Wage Growth Doesn’t Portend Falling Inflation

By: Russ Kamp, Managing Director, Ryan ALM, Inc.

We’ve mentioned “inflation” in 50 blog posts just since July 1, 2022. It is clearly on our minds and the minds of 99% of the investment community. What is our position? We are certainly not in the camp that inflation has been tamed and that the Fed’s 2% target is right around the corner. Our argument is quite basic. Given the strong labor market and rising wages, demand for goods and services will remain strong. Does this mean no moderation in our inflationary environment? No, it doesn’t mean that, but we don’t expect a dramatic reduction in inflation anytime soon, as many on Wall Street are predicting.

As the graph above highlights, wage growth continues to trend upwards. When people are working and earning greater wages, they demand more goods and services. The impact on inflation from Covid-19 production shortfalls and stimulus may be working through the system, but the Ukraine/Russia conflict is far from over and the outcome is certainly not known at this time. These impediments have certainly created supply and demand imbalances, but they are dwarfed in importance by 3.7% unemployment and 6% wage growth. Little evidence exists at this time that would lead one to believe that we are going to see a dramatic collapse in our current labor force. In my post from last week, I highlighted the fact that the Federal Reserve didn’t get its arms around inflation which started to spike in 1978 until 1981 when long rates were near 10% and unemployment was at 8.5%. Our current environment doesn’t come close to reaching those levels.

Lastly, rates have risen from historically low levels, but do you really believe that a 30-year Treasury bond yield of 3.57% (2 pm on the 12th) is going to curtail economic activity? My first house was purchased with a mortgage rate of >11% because I needed a place to live. What we wouldn’t have given to be able to finance that home at 6+%, which is today’s level.

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