Inflation is roaring, as everybody knows.
Real wages falling
But wages aren’t keeping track. Wages rose 1.4% in the second quarter, and 5.3% over the year ending in June, according to the Bureau of Labour Statistics’ Employment Cost Index released Friday.
While this is nominally a nice boon to workers, in reality income is falling in real terms when the rampant inflation is layered in – with real wages down 3.5% over the last year. With the labour market squeezed post-pandemic, employers have been raising wages to hire for open roles. But with an overheating economy coming out of incessant money-printing over the last two years, price rises in goods have outstripped the hikes in wages.
Dollar strength
With the global economy slowing down and sentiment turning – stock markets have plummeted – the dollar has risen, typical in recessionary times as investors flock to the global reserve currency, perceived as the safest of safe-haven assets.
Real wealth declining
However, the dollar’s strength is only relative to other fiat currencies. When plotted against real goods, the value is falling – signifying how real wages are declining above. Furthermore, the dollar’s strength is making US exports expensive, another point of concern as the economy clocks two negative quarters of GDP growth, generally considered the definition of a recession.
Fed reaction
The wage Employment Cost Index is a key consideration for the Fed, with Fed chair Jerome Powell even referring to the index as “important” in the meeting on Wednesday.
Following a second consecutive 75 bps hike this month, expectations were creeping into the market that the worst of the Fed policy may have been priced in, and markets had somewhat rebounded accordingly. At the time of writing, the S&P 500 is up another 1.1% on the day.
Compared to the lows set in June, the stock market is now up 12%. Despite sentiment picking up too, with a fragile geopolitical climate and the Fed still liable to change track, not to mention the very real problem of a cost-of-living crisis and slowing growth, it would be premature to say we are out of the woods yet.
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