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  • Alex Haseldine

Sticky But Not Stuck

According to yesterday's CPI report, the core services (Services ex energy services and shelter) component of inflation is making gradual progress. Although the Fed would prefer this to come down at a faster pace in year on year terms (6.1% in February, down 0.1% from January), it is worth noting the encouraging reduction in the annualised quarterly change of core services inflation, despite the recent small uptick from 3.6% in December to 4.5% in February (Figure 1).

Given the relevance that the NFIB small business survey has for consumer services (especially Leisure and Hospitality), the survey offers some useful insight for the direction of sticky, wage-dependent inflation. Small business plans to hike prices in the near future often lead the CPI core services numbers. The net-percent of NFIB respondents who plan to hike output prices fell 4 points on the month to 25%, down from 34% as recently as November. This is an encouraging sign for the direction of travel of 'sticky' inflation.

The NFIB survey also offered a clue into the inflationary pressures stemming from the labour market in February. Overall, the need for small businesses to chase new workers with higher salaries has come down sharply since October, where it reached an index level of 32 to 23 in February - although it did tick up slightly by 1% on the month. This is another positive sign for inflationary pressures.

Interestingly, Figure 4 suggests that the labour market has eased up for many small businesses. The gap between firms planning to increase worker compensation versus those expecting to increase employment levels has closed significantly. In November, the difference between the indices was 12%, compared to just 5% in February. A continuation of this trend implies a recovery in the availability of workers.

This moderate easing of hiring conditions has lead to a significant improvement in average hourly earnings for leisure and hospitality (closely related to small businesses in the NFIB). Nominal yearly wage growth in Leisure and Hospitality was at 6.9% versus a typical rate of between 2-4% pre-pandemic.


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