As we previously discussed, real wage growth is becoming a reality, having appeared in August. Average hourly earnings were up 2.9% and weekly earnings growth was 3.2%. Inflation stats have come in below expectations as we will discuss in this article. Before we get to that, it’s worth noting that the Fed will continue along with rate hikes even though inflation is moderating. The current chance of at least 2 more rate hikes in 2018 is 79.3% as the Fed will hike rates if growth is strong.

There’s fear of wage inflation driving up overall prices, but even with cycle high wage growth, inflation is still modest. If rates increase and inflation falls, real rates will quickly become positive. That’s one sign of more constrictive monetary policy. It will be interesting to see if the Fed stops saying policy is accommodative after its rate hike in September. There’s still a significant difference between neutral policy and constrictive policy, but we are inching closer with each rate hike. If you’re wondering when the cycle will end, we might not need a big burst of inflation to cause a recession if the Fed is going to steadily raise rates while inflation falls.

Negative PPI-FD

The main theory on Wall Street is the economy has about 2 years left in the business cycle. With solid growth in the first half of the year, strong wage growth, and the economy supposedly edging close to the end of the cycle, you’d expect inflation to be increasing significantly, but it isn’t. As you can see from the chart below, the producer price index declined 0.1% on a month over month basis in August.

Source: US Bureau Of Labor Statistics

That was the first decline since February 2017. This report missed estimates across the board. Month over month headline inflation was expected to be 0.2%. Year over year inflation fell from 3.3% to 2.8%. Keep in mind the producer price index measures prices at the base of the supply chain. Price changes are passed on to the consumer in various degrees.