September’s employment data was strong in every dimension, exceeding all published estimates. Job growth last month was the largest since March, the unemployment rate unexpectedly declined, and wages increased at a pace much greater than expected. Moreover, the pace of wage gains from the prior month was revised higher.
Wages are the largest cost of production. Cost push or wage inflation is now embedded in the economy, and historically it will either take a severe recession or an increase in workers to lower cost push inflation.
The longshoreman strike was temporary resolved until January with a 62% increase in wages over six years.
A media outlet interviewed several people at diner for their reaction. All five stated that they will ask their employer for higher pay or seek firms that will pay them a higher rate. This is the classic definition of cost push inflation
What is extremely dangerous is public sector unions. There is a strong probability that they too will demand such increases. Public sector unions is the only sector that has experienced union growth over the previous decade.
Bureaucracy does not produce a product. They are not subject to the traditional confines of capitalism…primarily productivity, efficiency, and profits. Bureaucratic power is measured by the number of employees and budget size not goods produced.
The size of government has surged in recent years. Quoting President Reagan, perhaps nine of the most terrifying words in the English language are “I am from the government, and I am here to help.”
Higher wages for government workers will increase the budget deficit.
The Federal Reserve [and almost every major Wall Street firm] has completely missed the path of inflation over the past 3-10 years. The huge surge in OER or what you can rent your house for if was indeed rental and comprises about 45% of the CPI was entirely missed by the Fed. The Federal Reserve now states OER will remain “elevated” for the next several years.
Has the Fed again misjudged the path of inflation? Is 2% unattainable given the increases in wages?
The bond market sold off aggressively on Friday. Before the data was released, the market was suggesting a 50-bps decrease may occur at the next FOMC meeting. Swap contracts now priced a 50-bps cut out and are now expecting only 25 bps. For the remaining of the year the market is suggesting a total of 56 bps of reduction.
Like economists, the markets have consistently misjudged where the overnight rate may be at a given date, always suggesting a considerably lower rate.
The economic calendar is comprised of several Teir I inflation indicators such as the PPI, CPI and import/export prices. Also released are the Minutes from the recent FOMC meeting and sentiment survey.
Last night the foreign markets were up. London was up 0.40%, Paris up 0.19% and Frankfurt down 0.23%. Japan was up 1.80% and Hang Seng up 1.60%.
Futures are down about 0.5% on the rethinking of monetary policy, the 10-year broaching a 4% yield and another 3% gain in oil on Middle East tensions. The 10-year is off 7/32 to yield 3.99%.
