First look: Why White House economists are optimistic about cooler inflation
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Top White House economists are optimistic that sticky inflation will be increasingly less so in the coming months as rapid wage growth continues to cool.
Why it matters: The new analysis — shared first with Axios — is part of an emerging consensus that the strong labor market is a key driver behind U.S. inflation. If that's true, the job market might have to loosen up before prices can fall to a more comfortable level.
Catch up quick: Economists studying inflation tend to look at a narrow measure of price gains, rather than the headline figures. The White House analysis looks at the services sector that excludes housing, energy and food costs.
- Fed chair Jerome Powell has said this area is the most likely to see higher labor costs from the tight jobs market — which may ultimately get passed on to consumers.
Between the lines: The White House identified parts of the service economy that are particularly sensitive to wages — think day care centers, auto repair shops, casinos and more. Others, like health insurance, aren't.
By the numbers: The Fed's preferred inflation gauge is the personal consumption expenditures price index, which rose 4.4% in the 12 months through April. Excluding food and energy, that measure rose 4.7% during the same period.
- According to new calculations by the White House Council of Economic Advisers, the "wage-sensitive" sectors accounted for a whopping 1.9 percentage points of that annual rise.
- Put another way, these sectors accounted for 41% of annual core inflation in April.
What they're saying: "[W]hile the initial pandemic runup" in overall non-housing core services inflation "was driven disproportionately (though not entirely) by the wage-insensitive components, more recently the vast majority" is among wage-sensitive sectors, according to the CEA blog post.
The intrigue: Wages are still rising across the services side of the economy, though notably more slowly than in early 2022.
- In April, average hourly earnings in the "non-housing" core services sector rose 4% from a year earlier — down more than 4 percentage points from the peak pace in January 2022. According to the CEA, that is a sign that inflation could cool further in this sector.
- The economists find that price inflation lags wage growth in the most wage-sensitive sectors by about 10 months.
- "However, we underscore our uncertainty," the economists write — noting, among other things, that inflation in other sectors could reaccelerate, as it did earlier in the pandemic.
Editor’s note: This story has been updated to clarify that the 4.4% increase in the personal consumption expenditures price index over 12 months rose to 4.7% if food and energy were excluded.
