TLDR:
- Unexpectedly strong U.S. wage growth has the potential to reignite inflation, warns Northwestern Mutual Wealth Management.
- Investors may be overlooking the significance of average hourly earnings rising by 0.4% for the month and 4.1% year over year.
- The Federal Reserve views 3.5% annual wage growth as the upper limit for achieving a 2% annual inflation rate.
- The next major U.S. inflation update is expected to show a slightly higher annual headline inflation rate of 3.3%.
- Investors remain confident in a soft-landing outcome for the U.S., but BlackRock analysts warn that sticky wage growth may disappoint.
The next major U.S. inflation update is expected to show a slightly higher annual headline inflation rate of 3.3%, according to economists. However, investors may be overlooking the significance of unexpected wage growth, which rose by 0.4% for the month and 4.1% year over year. Northwestern Mutual Wealth Management warns that this boosted wage growth has the potential to reignite inflation. The Federal Reserve views 3.5% annual wage growth as the upper limit for achieving a 2% annual inflation rate.
Despite recent efforts to bring inflation under control, the Fed remains concerned that a tight job market and rising wages could lead to a period of embedded high inflation. The minutes from the Fed’s December meeting reflect this “nagging concern” and indicate that uncertainty remains around future interest rate cuts. Investors, however, continue to express confidence in a soft-landing outcome for the U.S., where inflation can continue to fall without a recession.
BlackRock analysts express a different view, noting that stubbornly high wage growth is being driven by a tight labor market and that inflation is set to go on a roller-coaster ride. They warn of potential volatility in fixed-income markets as inflation’s persistence becomes clearer. While investors may be brushing off the potential reignition of inflation, the significance of rising wages should not be underestimated.
