13 March 2018

Bob Cunneen, Senior Economist and Portfolio Specialist

US interest rate vs inflation indicators

Chart of the week: Could America's 'sweet spot' of strong jobs and mild wages turn sour?

view larger chart

Source: US Federal Reserve, St Louis

America’s labour market is in an extraordinary ‘sweet spot’. Strong jobs growth has seen the US unemployment rate fall to a 17 year low of 4.1%. Even US wages growth has been remarkably mild with average hourly earnings only showing 2.6% annual growth in February (black line).

However, this could be only brief bliss for financial markets. Eventual labour demand will see US employees exercise their increased bargaining power to push for higher wages. Combine this with President Trump’s tax cuts and proposed tariffs for steel and aluminium as well as a weak US Dollar  and you have all the key ingredients for inflation pressures.

The US Federal Reserve (Fed) has projected that US inflation should modestly rise to 2% over coming years (green line).The Fed also expects interest rates to “gradually” move higher from their current low target range of 1.25% to 1.50% (red line). However with accelerating inflation, this guidance of “gradual” is not a guarantee. The Fed may need to move more aggressively and rapidly as sweet spots can easily turn sour when inflation ingredients are in the mix.

 

Important information

This communication is provided by MLC Investments Limited (ABN 30 002 641 661, AFSL 230705) (“MLC”), a member of the National Australia Bank Limited (ABN 12 004 044 937, AFSL 230686) group of companies (“NAB Group”), 105–153 Miller Street, North Sydney 2060. An investment with MLC does not represent a deposit or liability of, and is not guaranteed by, the NAB Group. The information in this communication may constitute general advice. It has been prepared without taking account of individual objectives, financial situation or needs and because of that you should, before acting on the advice, consider the appropriateness of the advice having regard to your personal objectives, financial situation and needs. MLC believes that the information contained in this communication is correct and that any estimates, opinions, conclusions or recommendations are reasonably held or made as at the time of compilation. However, no warranty is made as to the accuracy or reliability of this information (which may change without notice). MLC relies on third parties to provide certain information and is not responsible for its accuracy, nor is MLC liable for any loss arising from a person relying on information provided by third parties. Past performance is not a reliable indicator of future performance. This information is directed to and prepared for Australian residents only. MLC may use the services of NAB Group companies where it makes good business sense to do so and will benefit customers. Amounts paid for these services are always negotiated on an arm’s length basis.

Comments are closed.