Investment Institute
Viewpoint Chief Economist

Price-Wage race


  • More disinflation in the US – and that makes purchasing power resilient
  • A 25-bps hike is probably “in the bag” for the February FOMC meeting, but the March one matters more
  • As the labour market needs to land for disinflation to fully settle in, the anti-inflation consensus is likely to erode

The word “goldilocks” has appeared frequently in the market literature of the last weeks. Disinflation is emerging without a drastic deterioration in the real economy – for now – and indeed, the December batch confirmed the signals already visible in November: US inflation is declining. If one excludes rents, to avoid being “tricked” by their inherently sticky nature, core inflation is even falling very fast. Prudence is however of the essence. It’s possible to see the current price configuration as a transitory “lull” where old, supply-driven inflationary forces are abating, and newer, demand-side forces, supported by a still robust labour market, have not peaked yet.

For now, the ongoing disinflation is meeting still strong wage growth. On a three-month annualized basis, weekly real wages have stopped declining in the US. We like to think about price/wage loop, with wages catching up with prices and fuelling further inflation. Here, a price/wage race might be a better description of the issue at stake. The resilience in purchasing power may delay the slowdown in consumption and economic activity needed to ensure that the labour market lands, and that a truly lasting disinflation sets up.

In any case, Fedspeak was clear enough last week to believe another slowdown in the pace of hiking is “in the bag” for the next FOMC meeting on 1 February to 25bps. Yet, it’s probably the March meeting which is crucial, since it should coincide with a stark change of messaging from the Fed for the current market expectations – a terminal rate below 5% - to be vindicated. We still believe this will be too soon. We think central banks won’t be able to stop before seriously impairing aggregate demand and cooling down the labour market, and we are unlikely to be there by the end of Q1. This will become a much more complicated moment for them. Some empirical findings suggest households’ perceived well-being is more adversely affected by a rise in unemployment than by an acceleration in prices. The consensus around the “good fight” against inflation is likely to erode.

Have our latest insights delivered straight to your inbox

SUBSCRIBE NOW
Subscribe to updates.

Related Articles

Viewpoint Chief Economist

One Week at a Time

Viewpoint Chief Economist

Taking the Plunge

Viewpoint Chief Economist

The (welcome) Return of Boring

    Disclaimer

    This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.

    It has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. Its analysis and conclusions are the expression of an opinion, based on available data at a specific date.

    All information in this document is established on data made public by official providers of economic and market statistics. AXA Investment Managers disclaims any and all liability relating to a decision based on or for reliance on this document. All exhibits included in this document, unless stated otherwise, are as of the publication date of this document.

    Furthermore, due to the subjective nature of these opinions and analysis, these data, projections, forecasts, anticipations, hypothesis, etc. are not necessary used or followed by AXA IM’s portfolio management teams or its affiliates, who may act based on their own opinions. Any reproduction of this information, in whole or in part is, unless otherwise authorised by AXA IM, prohibited.

    Issued in the UK by AXA Investment Managers UK Limited, which is authorised and regulated by the Financial Conduct Authority in the UK. Registered in England and Wales No: 01431068. Registered Office: 22 Bishopsgate London EC2N 4BQ

    In other jurisdictions, this document is issued by AXA Investment Managers SA’s affiliates in those countries.

    Back to top