As per the revised Q4 data, we now see that unit labour costs slid at a 5.9 % annual rate, the third decline in the past four quarters. On a year-over-year basis, unit labour costs plunged 4.7%, which is unprecedented (the pre-revised YoY trend was -2.8%). As the chart illustrates, there is a tight 82% correlation between unit labour costs and the trend in headline inflation, which we can only assume is going to fall sharply in coming months and quarters.
By way of comparison, commodity prices only have a 33% correlation to the inflation rate — in no small part because 60% of the CPI is in services and there is a whole host of cyclical services ranging from hotels, to recreation, to rents that are deflating, and deflating fast.
David Rosenberg
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