US: Phillips curve is alive – Westpac

Richard Franulovich, Head of FX Strategy at Westpac, suggests that it appears the US Phillips curve is alive and well after all, judging by the recent acceleration in US average hourly earnings and the employment cost index (ECI).

Key Quotes

“But, an unemployment rate of 3.7% has usually associated with an ECI rising a much faster pace. As many have noted the unemployment rate overstates labour market tightness. The employment to population ratio for prime aged workers is a much better gauge and on that metric wages growth of 3% is about what one should expect with the employment to population ratio for prime aged workers at 79.7% and only just back to pre-crisis levels.”

“In fact, an ECI of 3% is strictly speaking “above the line of best fit” based on the post-crisis 2010-2018 link with the employment to population ratio. The pass through to inflation is however an altogether different question; as panel two slide two shows the link between earnings and the core PCE is weak. In fact the coefficient from a simple rolling ten year regression of core PCE against average hourly earnings is zero.”