Price increases on imported goods in February coupled with U.S. dollar weakness suggests inflation will pick up this year.
Adobe Stock / Артем Постоев

I just returned from the co-located National Ready Mixed Concrete Association, National Stone, Sand & Gravel Association, and Portland Cement Association Annual Conventions in Houston which were held over the course of the past few days. The co-location of these conventions was both a great idea and a great success. If the attendance at these kinds of industry events are any measure of the health of our broader construction materials industry, then we must be hitting the ball out of the park. The headcount was extremely high, optimism was buoyant, and everyone generally felt the next few years will be prosperous for their companies and our industry.

But there are always the negatives that drag on the overall optimism, and I heard it again widely at the meetings: the labor shortage is shifting from acute to critical, coupled with pressure to increase wages. And now we read in the popular business press that employers across the U.S. reported to the Federal Reserve that wage growth has picked up since the beginning of the year, signaling the tight labor market may be forcing employers to offer higher wages to compete for workers, confirming the fears I heard at the conventions. In many of the Fed’s twelve regional districts, while wage growth picked up, companies across the country reported continued worker shortages, particularly in the construction, information technology and manufacturing sectors.

Businesses in almost all parts of the country saw employers raise wages and expand benefit offerings to attract workers; the recent tax reform is also encouraging firms to increase pay, with some districts reporting increases in compensation following the tax bill’s passage. One large retailer in the Boston district said it planned to pass along half of its savings from the corporate tax cut to some workers by raising wages, and in the Minneapolis district, the tax reform led to some one-time bonuses.

A stronger-than-expected jobs report released in early February raised more concerns of an increase in wage growth, and therefore heightened inflation. Meanwhile, it seems that price growth was also occurring - the price index for personal-consumption expenditures, the Fed’s preferred inflation measure, advanced 1.7% from a year earlier in January. The annual gain was the same as recorded in December and November. The Fed has set an annual target of 2% inflation, but has struggled to hit it in recent years. But the unemployment rate in January remained steady at a 17-year low of 4.1%, and in 2017, the U.S. notched its strongest year of economic growth in three years. And as I have expressed for weeks now, no one knows how much further fuel the recent tax overhaul could add to an economy that is already showing real strength.

Fed officials have said the economy’s growth prospects have strengthened in the past few months. The heightened prospects indicate the central bank is on track to keep gradually lifting short-term interest rates and perhaps even pick up the pace this year if inflation flares to a level the Fed considers unhealthy for the economy. And the biggest single factor in fueling inflation will be wage growth… I would like to say it is right around the corner, but it looks like it is already here.