US price inflation and wage growth still muted

Today's batch of data releases aren't going to convince the doves on the FOMC to vote for a December rate hike. Several officials have stressed that they want to see an acceleration in price inflation and wage growth before countenancing a hike and, unfortunately, both are notably absent this morning.

The employment cost index measure of compensation increased by 0.6% in the third quarter. That is a lot better than the disastrous 0.2% gain in the second quarter but, in annualised terms, it is still only slightly less 2.5% growth per year, which is pretty muted. Even worse, the annual growth rate of ECI compensation remained unchanged at only 2.0% y/y in the third quarter.

Elsewhere, the core PCE deflator increased by a modest 0.1% m/m in September, and the annual core PCE inflation rate remained at only 1.3%, a long way below the Fed's 2% target. The three-month annualised core PCE deflator growth rate was also down to 1.3% in September, from a recent peak of 1.9% in June.

Adding to the gloom, personal income increased by only 0.1% m/m in September, which isn't that surprising given the slowdown in employment growth and the fact that average hourly earnings were unchanged. At least incomes increased by a slightly bigger 0.2% m/m in real terms, thanks to the gasoline-led drop in prices last month. Similarly, while personal spending only increased by 0.1% m/m last month in nominal terms, it did rise by 0.2% m/m in real terms.

"With the labour market approaching full employment, we still anticipate that rising wage growth and underlying inflation will be the big surprise next year, eventually forcing the Fed to hike interest rate more aggressively. But that clearly hasn't happened yet, which is why the first rate hike is probably going to be delayed until early next year", says Capital Economics in a research note.