La course aux prix et aux salaires

• More disinflation in the US – and that makes purchasing power resilient
• A 25-bps hike is probably “in the bag” for the February FOMC meeting, but the March one matters more
• As the labour market needs to land for disinflation to fully settle in, the anti-inflation consensus is likely to erode

The word “goldilocks” has appeared frequently in the market literature of the last weeks. Disinflation is emerging without a drastic deterioration in the real economy – for now – and indeed, the December batch confirmed the signals already visible in November: US inflation is declining. If one excludes rents, to avoid being “tricked” by their inherently sticky nature, core inflation is even falling very fast. Prudence is however of the essence. It’s possible to see the current price configuration as a transitory “lull” where old, supply-driven inflationary forces are abating, and newer, demand-side forces, supported by a still robust labour market, have not peaked yet.

For now, the ongoing disinflation is meeting still strong wage growth. On a three-month annualized basis, weekly real wages have stopped declining in the US. We like to think about price/wage loop, with wages catching up with prices and fuelling further inflation. Here, a price/wage race might be a better description of the issue at stake. The resilience in purchasing power may delay the slowdown in consumption and economic activity needed to ensure that the labour market lands, and that a truly lasting disinflation sets up.

In any case, Fedspeak was clear enough last week to believe another slowdown in the pace of hiking is “in the bag” for the next FOMC meeting on 1 February to 25bps. Yet, it’s probably the March meeting which is crucial, since it should coincide with a stark change of messaging from the Fed for the current market expectations – a terminal rate below 5% - to be vindicated. We still believe this will be too soon. We think central banks won’t be able to stop before seriously impairing aggregate demand and cooling down the labour market, and we are unlikely to be there by the end of Q1. This will become a much more complicated moment for them. Some empirical findings suggest households’ perceived well-being is more adversely affected by a rise in unemployment than by an acceleration in prices. The consensus around the “good fight” against inflation is likely to erode.