Wages are Sticky - 7% Annualised!

Macro Perspectives: Mon 6 Sep 2021

The jobs report on Friday showed just 235,000 jobs added in August - well below expectations.

As we've discussed last week, the conditions for job growth will only improve in the coming months. For at least half of the country, we'll see the unemployed re-enter the workforce, as the additional unemployment compensation from the federal government has ended.

More important than the jobs number was the wage number.

The change in wages from July to August was 0.6% - that's an annualised rate of more than 7%!

This "wage component" is like pouring gasoline on the inflation fire and is where the Fed's case for "transitory" inflation breaks down. Sure the supply chain issues will ultimately work out, and relieve those price pressures, but wages are sticky. The government has reset the "living wage" through its federal unemployment subsidy and it's much, much higher. The genie is out of the bottle.

We know all of this. We've been talking about this for a long time. Now we're seeing it sustained and feeding into the inflation data. It has led to higher input costs for employers, and those higher costs are being passed onto consumers (without hesitation) in the form of higher prices. Executives have raised prices not just once, but two and three times already.

So we should expect the Fed to execute on an exit of QE, beginning maybe as early as October. Then the big question will be, how soon will the Fed be forced to start hiking rates? If we look at the quarterly annualised inflation rate running at close to 7%, with the prospects of hotter economic activity in front of us (not behind us), the Fed may be looking at double-digit (trailing twelve month) inflation, or close to it, by the end of Q1 next year.

Bottom line, our cash continues to be devalued and that promotes the reset of asset prices we've been talking about for 17-months. The price of stuff, relative to the money in your pocket, will continue to rise for the foreseeable future.