US & eurozone wage pressures ease, even as headline inflation rebounds

Oil-driven inflation rise in the US won’t trigger Fed hike

Core inflation surprised to the upside in August at 0.3% m/m, above our and consensus expectations for a 0.2% m/m rise (annual core inflation continued to decline, to 4.3% y/y from 4.7% in July). Headline inflation meanwhile jumped 0.6% m/m, driven by the pass-through of higher oil prices to petrol pump prices, which pushed annual inflation back up to 3.7% from 3.2% in July. While falling used car prices continued to drag down core goods inflation, services inflation was lifted by another jump in car insurance premiums (+2.4% m/m) as well as higher airfares (+4.9%), the latter likely driven by rising fuel costs. Inflation in other services categories continued to ease, with the important shelter category registering a meagre 0.3% m/m gain – the smallest monthly rise since August 2021. Inflation in restaurants picked up to 0.3% m/m, but remains well below the elevated price growth seen in 2022, when monthly price rises averaged 0.7%. Inflation in the labour-intensive recreation and personal care categories eased back, likely reflecting the recent cooling in wage growth. The latter was confirmed by the latest update to the Indeed wage growth tracker yesterday, which at 4.5% y/y in August is less then half the peak of 9.3%, and is now close to the pre-pandemic pace of wage growth. The Atlanta Fed’s wage growth tracker tells a similar story (see chart below). All told, we think the Fed will draw comfort from the continued broad disinflation that we are seeing, and that it will look through the oil-driven rise in headline inflation – particularly given that the labour market is now clearly softening and wage growth is cooling rapidly. We continue to think the Fed will keep policy on hold when the Committee decides on monetary policy next week, and our base case is that interest rates in the US have peaked.

Eurozone wage growth slows down markedly

The ECB’s indices for wage growth per hour and per employee slowed down markedly in Q2. Both series are adjusted for calendar and seasonal effects and both indices rose by only 0.6% qoq in Q2, down from 1.3% (per hour) and 1.8% (per employee) in Q1. Despite the drop in quarterly wage growth, base effects lifted the yoy change in both wage measurements in Q2. Hourly wage growth rose from 5.0% in Q1 to 5.4% in Q2 and wage growth per employee from 5.5% to 5.6%. The upward base effects on yoy growth in wages should come to an end later this year, with the yoy rise in wages likely to drop sharply lower. Indeed, even if we assume some volatility and a jump in quarterly wage growth in the coming quarters (to around 1% qoq, which would be well above the historical average) yoy wage growth would drop to around 3% moving into next year, which would already be consistent with the ECB’s medium term inflation target of 2%, assuming that trend growth in productivity is about one percent. All in all, it seems that the catch-up in wage growth following the sharp acceleration in headline inflation since the start of last year is already largely behind us, and that wage growth is normalising again.