If the Fed is really targeting 2.0 percent inflation, it is hard to understand why it would be considering further interest rate hikes. Inflation has been slowing in recent months, to a rate of just 1.4 percent in the core personal consumption expenditure deflator. The June jobs report gave more evidence that wage growth is slowing as well. The figure below shows the annualized rate of inflation taking the average hourly wage for the last three months (April, May, and June), compared with the average for the prior three months (January, February, and March).

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Source: Bureau of Labor Statistics.

As can be seen, there was some acceleration in wage growth by this measure in the first half of 2016, with a peak of just over 3.0 percent in May. Since then the general direction has been downward. The most recent data puts the annualized rate of wage growth by this measure at just over 2.0 percent. We all know the story that wage growth is supposed to accelerate in a tight labor market, but maybe the data are trying to tell us that the labor market just isn't very tight.