ECONOMIC REPORT OF THE PRESIDENT

productive innovation. There is no silver bullet for improving productivity
growth, but sound policy across a range of initiatives could support it, raising
real wages and living standards in the process.
Wage and Price Inflation
Nominal wage inflation has trended up over the course of the recovery
as the labor market has continued to strengthen amid robust job growth.
Average nominal hourly earnings for private sector production and nonsupervisory
employees increased 2.4 percent during the 12–month period
ended November 2016, up from 2.3 percent during the year-earlier period.
Nominal hourly compensation for private-sector workers, as measured by
the employment cost index, increased 2.2 percent during the four quarters
through 2016:Q3, up from 1.9 percent in the four quarters of 2015.
Alternatively, the more-volatile compensation per hour measure for the
non-farm business sector, as measured by the labor productivity and cost
dataset, increased 2.2 percent during the four quarters through 2016:Q3,
below its 3.1-percent rise during the four quarters of 2015. Taken together,
as shown in Figure 2-31, nominal wage inflation has increased with the
strong recovery in the labor market. However, the pace remains below the
pre-crisis pace.
Consumer prices, as measured by the price index for personal consumption
expenditures (PCE) and shown in Figure 2-32, increased roughly
1.4 percent over the 12 months ended in October 2016. The growth rate was
held down by continued declines in energy prices, leaving overall inflation
well below the Federal Reserve’s longer-run objective of 2 percent. Core
inflation—which excludes energy and food prices and tends to be a better
predictor of future inflation than overall inflation—was also less than the
2-percent target, ranging between 1.6 and 1.7 percent thus far in 2016.15
Lower imported goods prices, as well as the pass through of lower energy
costs to non-energy goods, likely weighed on core inflation this year. The
speed and degree to which these factors wane are two keys to the inflationary
pressures in the economy this year. While inflation has picked up in
recent months, nominal earnings have also continued to grow considerably
15 The Federal Reserve defines its inflation objective in terms of the PCE price index. The
consumer price index (CPI) is an alternate measure of prices paid by consumers and is used
to index some government transfers, such as Social Security benefits. Largely because of a
different method of aggregating the individual components, PCE inflation has averaged about
0.3-percentage point a year less than the CPI inflation since 1979. Recently, though, the gap
between core price inflation has been larger across the two indices. During the 12 months
ended in October 2016, for example, core CPI prices increased 2.2 percent, more than the
1.7-percent increase in core PCE prices.
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