Implications for inflation in focus
By James Ong, Senior Macro Strategist, Noelle Corum, Associate Portfolio Manager, and Megan Heard, Associate, Market Research.
Posted on Expert Investment Views: Invesco US Blog.
Today's nonfarm payroll and wage statistics point to solid growth for the US economy. At 200,000 jobs, January employment gains were above consensus, and average hourly earnings surprised to the upside, growing 2.9%, a cycle high.1 Invesco Fixed Income has been very positive on US growth in the last several quarters, and these results support our view. January wage data were generally in line with our "wage tracker" model, which has been pointing to consistent (although slow) gains in wages. Today's robust jobs numbers support our forecast that the US economy could grow by around 2.75% in 2018.
So what does this mean for inflation? Higher wages are supportive of inflation over the medium term. Today's wage report may raise confidence that inflation will reach the US Federal Reserve's (Fed) 2% target in the long term. However, wage gains can take a long time to translate into actual price increases for consumers. Overall, Invesco Fixed Income is maintaining its six-month outlook for inflation, and we estimate that inflation will likely remain at around 1.7% for the first half of 2018. However, if we see persistent wage increases going forward, we may raise our inflation forecast for 2018 above our current expectation of 1.8%.
In terms of interest rates, we believe today's data affirm the Fed's expectation of three interest rate hikes in 2018. It also increases the chances that the Fed will revise up its view of how high the federal funds rate could ultimately rise. If wages continue to rise sharply, the Fed hiking cycle may extend into 2019 and 2020, and could be at a faster-than-expected pace. Increased expectations of further rate hikes in the medium term and perceived higher inflation risk could steepen the US Treasury yield curve and push interest rates higher.
Average hourly earnings ticking up
Source: US Department of Labor, IFI Wage Tracker. Data from April 30, 2007 to Jan. 31, 2017. The IFI Wage Tracker is Invesco's model of wage growth based on several indicators.
1 Source: US Department of Labor, Jan. 2, 2018
Blog header image: MikeDotta/Shutterstock.com
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