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Feb 8 -- A New Wage Measure for Core Non-Housing Services (CEA blog)

Policymakers, economists, and forecasters often track “core” inflation (price growth excluding food and energy) because it tends be a better predictor of future overall inflation than overall inflation itself. It has also been useful to further break down core inflation into three components: core goods, housing services, and core non-housing services, or NHS.

Core goods inflation—think clothing, appliances, cars, and electronics—has been cooling over the last year as COVID-related global supply chain disruptions have eased. Housing inflation meanwhile reflects growth in both new and existing rents with a lag; market data on new rents suggests there have been declines in rental growth recently that many analysts expect to show up as lower inflation later this year.

The last category, NHS inflation, has garnered considerable interest of late. Because non-housing services are more labor intensive than the other categories, some surmise that the tight labor market may be playing a meaningful a role in this part of inflation.

Several prominent wage measures like average hourly earnings (AHE) in the Establishment Survey and the Employment Cost Index (ECI) have seen slowing nominal growth but positive inflation-adjusted growth in recent months. However, neither of these measures are ideal for probing the potential relationship between NHS inflation and the labor market. The AHE is sensitive to compositional effects: the skews in average wages that can arise from hiring and firing. Even measures that do control for compositional effects, like ECI, are broad-based and do not focus on the industries that are the most relevant for wages in the NHS portion of the economy.

This blog post presents a wage measure that CEA has constructed to be specific to NHS industries, called “NHS AHE,” which addresses both limitations. Methodological details are in the data appendix, but to summarize, NHS AHE is a weighted average of the hourly wage in 175 detailed nonfarm payroll sectors from the monthly Establishment Survey, weighted by each sector’s share of 2019 labor costs in final demand consumption of services excluding food, energy, and housing. Because the weights are based on NHS labor costs, the index better reflects the dynamics of wages serving as inputs into NHS production than commonly-cited wage measures like AHE and ECI. And because the weights are fixed to 2019 levels, the index is less sensitive to compositional shifts than unadjusted average measures like AHE. . . .
CEA will continue to track and report on these trends as they evolve.
Construction of the NHS AHE index

The NHS AHE index is an aggregate of detailed industry-level average hourly earnings released by the Bureau of Labor Statistics (BLS), weighted by 2019 labor costs in final demand consumption of services excluding food, energy, and housing.

The underlying industry-level weights wi for each industry i are the product of three sources: . . .
WSJ: New White House Wage Data Show Slowing Pressure on ‘Supercore’ Inflation https://www.wsj.com/articles/new-white-house-wage-data-show-slowing-pressure-on-supercore-inflation-11675820478?st=8q8g9ywe018g4s8&reflink=desktopwebshare_permalink

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