For the UK and US the worry is not about jobs growth but about how quick prices will start to rise. As we saw this morning in the UK jobs data, earnings aren’t exactly rocketing. Europe has an issue with inflation but has many other bad elements it needs to fix. The US, despite the August jobs report is (as of now) a pretty steady ship but also lacks the wage growth needed to bring a second wind to the domestic economy.
At the bottom of the hour we get to see US CPI data for August. We’re expecting 1.9% vs 2.0% prior for the headline and an unchanged 1.9% for the core.
The Fed has said it is happy to see inflation moderately above target in the short term, but as we’ve seen time and time again, especially in Europe, inflation is not a genie you can control when it’s out of the bottle.
The risk to the Fed is that we get a prolonged period of high inflation while wages remain subdued. It will make it hard for them to turn to rates to contain any excess inflation when the man on the street is fighting to stay afloat, let alone keep on an even keel with prices.
We’re not there yet but it’s a scenario that is worth keeping an eye on as it could put the Fed, and the BOE in a very difficult position.
I shouldn’t think the market would be spooked by a rise to 2.1% or a fall to 1.7% but outside of those parameters the market may adjust its rate expectations. If we get a lower number and the dollar falls then that might not last long as the market is in ‘expectant Fed’ mode once again and will probably fade any moves lower.