Washington’s Inflation Trifecta

Talk about a juxtaposition loaded with implications. Taken together, the contrasting trends in the chart below are the very opposite of the “all clear” on the inflation front that the casino seems to be pricing in at the moment.

Then again, Wall Street has been coddled, stimmied and backstopped by the Fed for so long that it has apparently forgotten that risk even exists. Accordingly, it appears to be pricing an across-the-board “all clear” on practically every dark cloud around—-the debt ceiling, the impending recession, the Fed’s tightening campaign, the bottomless pit of war in Ukraine, Washington’s escalating confrontation with China, the coming trainwreck of the green energy transition and much more.

Still, when it comes to the core inflation issue the gamblers have become literally blind as a bat. First, here’s a real baddie if there ever was one when it comes to the now embedded inflationary dynamic. To wit, during the eight years between 2012 and Q3 2020, labor productivity (red line) grew at a subpar but respectable 1.64% per annum.

Since then, however, it has gone into reverse. The annualized growth rate during the last 2.5 years through Q1 2023 now stand’s at -0.80%. That is to say, all those low-pay, semi-part time jobs that have been recovered since the Lockdown bottom in Q2 2020 have actually diluted the average level of per hour productivity in the US economy overall.

By contrast, the rate of wage growth (black line) has accelerated sharply as between the two periods. During the 8.5 years through Q3 2020, average hourly compensation in the nonfarm business sector rose by 3.3% per annum. But since then the annualized rate of gain has risen sharply to 5.0%.

In short, since the deep but short-lived Lockdown recession of Q2 2020 (gray vertical line), the contrast between the two variables could not be more stark. And the widening gap between the two tells you all you need to know about the outlook for inflation. To wit, domestic production costs, which are heavily impacted by the difference between wages and productivity, are rising rapidly.

Index Of US Labor Productivity Versus Hourly Wage Rates, 2012-2023

For want of doubt, here is the data for nonfarm unit labor costs. The 6.3% increase in 2022 was the highest gain since 1981.