Markets have been struggling to find a theme so after higher CPI numbers in the US, inflation is suddenly on the tip of everyone’s tongue. The PCE report is due on Wednesday and that could ramp up the chatter.
In the meanwhile, it’s worth watching the debate. Rising food and energy prices are painful for consumers but so long as they’re driven by the costs of global commodities, there is nothing the Fed can or will do about that kind of inflation. What’s important is rising wages, which can threaten to create the dreaded wage-price spiral.
The question is: when would the Fed act to snuff out wage inflation. There are two arguments.
- Wages have lagged inflation for years and deserve some time to catch up. Real median earnings are depressed and it would be healthy to tolerate some higher inflation to allow wages to rebalance.
- Interest rates aren’t just low, they’re at the absolute bottom. Hiking rates 50 or 100 basis points won’t snuff out the recovery and will keep inflation contained.
The market mostly believes in option two but with non-stop talk of inequality the risk is that the Fed shifts to a more patient view.
