Service Wages Keep Bedeviling Powell and the Markets


The Federal Reserve received bad news on the services sector, one of the last suspects of high inflation in the US. That’s fueling more speculation that interest rate hikes may have a ways to go, and markets don’t like it.

It’s understandable. A Labor Department report on Friday showed that average hourly earnings for private sector workers rose 0.6% in November from the previous month, the fastest pace since October 2021. In the last three months of data, the figures show an average level of services-wages growth of about 6.2%, too high for the Fed, which may see the continuation of the no the rate is sitting below 3.5%. Hourly earnings rose slightly, helping the manufacturing sector, and nonfarm payrolls growth slowed. slightly more than 263,000 jobs in November. But service work is very important.

Why put the focus there? As Fed Chairman Jerome Powell introduced in his speech this week, the service sector may be the most difficult part of the US inflationary puzzle. The supply crunch that may have started the whole crunch has shown the strength of the correction, and the prices of many goods and commodities have fallen. Forecasts ahead of home listings, another key driver of 40-year highs, also indicate complacency. But other key areas of service continue to challenge the Fed, and wages may be a big part of that. This is how Powell expressed it in his speech on Wednesday at the Brookings Institution:

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This is perhaps the most important area for understanding the future of economic growth. Since wages are the biggest cost in the provision of these services, the labor market holds the key to understanding the cost of this sector.

There is a perverse element to the push for lower wage growth, which is often associated with a weak labor market and high unemployment. no jobs. The idea of ​​the wage-pass price-has many skeptics who note, rightly, that the current inflation is not caused by the scarcity of the labor market. In fact, many years before the Covid-19 pandemic caused a lot of intellectual criticism of the Phillips Curve, the economic model that has long established the concept of the relationship between the price and low unemployment.

But the economy at the end of the disease was different from many years ago in the large shortage of workers that it did, and it is reasonable to suspect, for example, that there will be a direct line between the rapid increase in the wages of hairdressers and the price of a haircut, or the income of hotel workers and the price of a vacation. Powell seems to feel the same way, given his speech on Wednesday. In terms of this month’s data, the rise in service sector wages appeared to be broad-based, including jumps in retail trade, professional services and a recovery in health and education services. , which recently showed signs of cooling in the same data.

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As always, it’s important to take Friday’s data with a grain of salt. The S&P 500 Index was down 1.1%, and the yield on the 10-year Treasury bond rose 9 basis points to 3.59%, but the markets are still recovering. from another side of November. Ultimately, it could be more than just this report that changes market sentiment, and the next big shock may not come until the consumer price report on December 13. It’s just one month of labor market data, and the Fed tries. the Department of Labor’s job cost index is satisfied for a comprehensive review of the compensation picture adjusted for collective effects. (The next update to that index won’t appear until late January next year, before the Fed’s first decision of 2023.)

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The data channel is also spreading some signs of hope. Just one day ago the Commerce Department reported that personal spending — the Fed’s measure of inflation — rose 0.2% in October, including a 0.3% increase in services excluding buildings and energy. But with the Fed intent on curbing inflation, policymakers may err on the side of doing more than less. Every time they get a piece of information like paychecks, it only reinforces their desire to stay on track.

Added from Bloomberg Opinion:

• Powell and Markets Talk to Each Other: Mohamed El-Erian

• The Fed Is Expected to Be No Less Than an Economic Miracle: Karl W. Smith

• Jawboner’s CEO’s permission of Information: Jonathan Levin

This column does not reflect the opinion of the board of directors or Bloomberg LP or its members.

Jonathan Levin has worked as a Bloomberg reporter in Latin America and the US, covering finance, markets and M&A. Most recently, he was the manager of the Miami office. He is a CFA charter holder.

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