Markets Trade with No Memory

Written by Richard Hokenson 

There is a high probability that the Employment Situation report for June to be released on July 7 will show an acceleration in wage inflation (percent change from the year-ago month) as measured by Average Hourly Earnings (AHE). We base that assessment on the fact that the monthly increase in AHE in June 2016 was only 3 cents (see Chart 1). Because markets trade with no memory, i.e. almost no one looks at what occurred a year ago, most are unaware that the size of the monthly change in the prior year affects the volatility in wage inflation that the markets focus on (see Chart 2).

A “small” increase in the year ago month increases the likelihood of a “large” increase in wage inflation for the current month. Conversely, a “large” increase in the year-ago month increases the likelihood of a “small” increase in wage inflation. This is what has occurred recently. In December 2016 and February 2017, wage inflation accelerated. Conversely, the recent deceleration in wage inflation (March, April and May) benefitted from relatively “large” monthly increases in those three months last year.

In order to more fully comprehend the impact of the year-ago month on wage inflation, Table 1 displays the results since January 2016. The monthly increase is sorted low to high on the basis of the change in cents per hour for the same month in the prior year (Column 1). Column 2 displays the change in cents per hour for the current month; column 3 is the difference. Column 4 displays wage inflation for the current month; column 5 wage inflation for the prior month. Most relevant is Column 6 which displays the ratio of wage inflation in the current month relative to the prior month. it is generally true that the ratio is above 1 (an acceleration in wage inflation) for months with “small” changes in the year-ago month and below 1 (a deceleration) for months with “large” changes in the year-ago month.


The net result of this exercise is that it takes at least several months to establish or confirm any change in trend wage inflation as measured by AHE. In the meantime, we can expect sentiment regarding wages to be whipsawed because of the monthly volatility in the year-ago month. If our forecast for June 2017 confirms an acceleration in wage inflation, the inflation perma bears will celebrate. But the celebration may not last long because the monthly increase in July 2016 was 9 cents, setting the stage for a probable deceleration in wage inflation to be reported in August.


This update was researched and written by Richard Hokenson, as of July 6 2017