A protester dressed as a fake banknote speaks into a megaphone at a rally in support of minimum wage increase in New York, U.S. (Photographer: Victor J. Blue/Bloomberg)

Even a Strong U.S. Wage Number May Fail to Ignite Inflation Bets

(Bloomberg) -- Friday’s U.S. jobs report is set to show a tight labor market that’s pressuring companies to keep boosting wages -- but prices, not so much.

Even a significant gain in average hourly earnings probably won’t change a widespread market view that inflation is dormant. Federal Reserve Chairman Jerome Powell’s comments Wednesday that subdued readings may be short-lived undermined bets on for an interest-rate cut, while inflation expectations further declined, potentially bolstering President Donald Trump’s calls for big monetary stimulus.

Wages probably increased 3.3 percent in April from a year earlier, up slightly from March’s 3.2 percent rise, while companies added 190,000 workers to payrolls, according to the median estimates of economists surveyed by Bloomberg. They project unemployment at 3.8 percent, unchanged from March.

Even a Strong U.S. Wage Number May Fail to Ignite Inflation Bets

The ninth straight month of at least 3 percent earnings growth typically would prompt expectations that businesses will raise prices, but inflation has weakened this year to well below the Fed’s 2 percent target. Meanwhile, economic growth accelerated in the first quarter after early signs it would slow.

“That’s been the conundrum that everyone’s acknowledged, which is with a reasonably strong economy and low unemployment we have yet to see inflation cost pressures pass through to core inflation,” said David Leduc, active fixed-income chief investment officer at asset manager Mellon.

Markets have become more fixated on inflation since the Fed made clear in January that subdued price pressures would keep it from raising its benchmark rate. Powell’s assurance Wednesday that officials are “comfortable” with current policy caused a recalibration in interest-rate markets, pushing pricing for a full quarter-point rate-cut from year-end to mid-2020.

Powell said officials expect the factors holding down inflation to be transitory, after the central bank reiterated it “will be patient” on interest rates as it considers adjusting borrowing costs.

“You have very strong job creation, and you have wages moving up at a rate that is appropriate given inflation and given productivity but not at all signaling any overheating,” Powell said.

What Bloomberg’s Economists Say

“While Powell stated that there is little evidence to suggest the economy is overheating at the moment, the fact that both average hourly earnings and the employment cost index are running near cyclical highs is a potential harbinger of firming price pressures later this year.”
-- Carl Riccadonna and Yelena Shulyatyeva, economists
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“The Fed is acknowledging this breakdown between wages and price inflation,” said Matthew Luzzetti, chief U.S. economist at Deutsche Bank AG. “Therefore the rates market should not be responding as much to developments on wage growth.’’

The modest increase in market expectations for inflation has reversed over the past week. That’s partly tracking oil prices, but a steeper drop Thursday suggests “the market is questioning the Fed’s willingness and ability to hit its symmetric target,” said Michael Pond, rates strategist at Barclays Plc.

Even a Strong U.S. Wage Number May Fail to Ignite Inflation Bets

Trump disagrees with the central bank’s approach. He tweeted on Tuesday, in the middle of the Fed meeting, that the economy would soar “if we did some lowering of rates, like one point and some quantitative easing.’’

This might cause the economy to take off, but it also would increase the risk of a crash-landing later, economists say.

Separate data show employment costs in the first quarter rising in line with the prior period, indicating inflationary pressures are holding up but not breaking out.

It would take a big number in Friday’s jobs report to put the market on alert, according to Pond at Barclays. He said an above-consensus monthly increase in average hourly earnings of around 0.4 percent might prompt a selloff in short-dated Treasuries.

Recent gains in productivity -- which rose in the first quarter at the fastest pace since 2014, according to data Thursday -- may be helping to keep the labor market humming and inflation fears low. That means wages can rise more without feeding so much into prices, Deutsche Bank’s Luzzetti said.

“That absolutely does suggest that the expansion that we’re seeing does have more legs,” he said.

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