How quickly things change in a month: The “great inflation scare of 2018” has died down after the latest U.S. jobs report showed a smaller increase in how much workers are paid.
And now a milder uptick in consumer prices will offer more comfort to anxious investors.
Average hourly wages rose just slightly in February, reducing the 12-month increase in worker pay to 2.6% from 2.8%. Wage growth actually slowed even as the economy added 313,000 new jobs, the most in a year and a half.
The muted increase in worker pay last month stood in sharp contrast to a spike in January that stoked fears of rising inflation, caused stock markets to plunge and sent interest rates higher. Relieved investors reacted by snapping up stocks on Friday and driving a 350-point gain in the Dow Jones Industrial Average DJIA, +1.77% .
“Workers are seeing better gains, but not nearly so quickly as to threaten inflation,” said Douglas Porter, chief economist of BMO Capital Markets.
More good news on the inflation front could come this week from a report that measures changes in how much households pay for goods and services.
The consumer price index is forecast to increase a modest 0.2% in February following an outsized 0.5% advance in January. The report will be issued Tuesday.
“We could get another sign that inflation isn’t picking up as quickly as it seemed, “ said Andrew Grantham of CIBC Economics.
Similar gauges on U.S. wholesale prices and imported goods are also expected to throttle back after large gains in January tied in part to higher oil prices. Petroleum prices fell in February after hitting a four-year high at the start of the year.
In short, inflation is still low and shows no sign it’s about to spiral rapidly higher.
The seeds of higher inflation, however, have already been planted.
For one thing, the U.S. continues to churn out a surprisingly high number of new jobs each month even though the current economic expansion has lasted nearly nine years.
An already low 4.1% unemployment rate is likely to fall further, putting more pressure on companies to raise wages as they compete for workers in the tightest U.S. labor market in two decades.
Then there’s the global economy. It’s growing at the fastest rate since the Great Recession a decade ago. That’s starting to force up the price of key commodities.
Against that backdrop, most economists predict inflation will soon meet or even exceed the Federal Reserve’s 2% inflation target using the central bank’s preferred PCE index.
The PCE tends to run a bit cooler than the consumer price index. While the increase in consumer prices is running at a 2.1% annual clip, the PCE is rising at a slower 1.7% rate.
The speed at which inflation rises is crucial in determining how many times in 2018 the Fed raises interest rates — the cost of borrowing. The central bank has pegged in three increases, with one likely to come later this month.
Even though U.S. interest rates are low by historical standards, the higher they go the more expensive it is for Americans to buy a car, get a home mortgage or start a small business.
That’s still not a big worry right now. But it could be soon enough.