The inflation cycle is not dead; it is in the process of rotating to the wage side. The average hourly rate rose 0.44% in December, the fastest gain in six months. Significant pay increases in the manufacturing sector are primarily responsible.
Wage increases for non-supervisory workers in manufacturing rose 0.9% in December, which comes on the heels of a 0.8% increase in November. The UAW agreement is mainly responsible for the back-to-back substantial wage gains.
Remember that the non-union wage increases of 10% or more at Toyota, Honda, Tesla, and many others that followed the UAW agreements take effect in January, so substantial gains in manufacturing wages will continue.
Manufacturing wage gains are running at their fastest pace in forty years. That, along with steady increases in the service sector, should lift overall employee compensation costs to well over 5% in 2024, creating a dilemma for the Fed as labor gains of that scale are inconsistent with inflation slowing to 2%.