After over a year of stubbornly high inflation fueled by a red-hot labor market, June's employment report could mark a crucial turning point. The days of the "wage-price spiral" narrative look to be numbered based on the latest data projections.
Economists expect the monthly jobs number to show a marked deceleration from May's explosive 272,000 gain, with payroll growth around 190,000 for June. This would align with other signals of cooling labor demand like declining job openings and rising weekly jobless claims.
But the most important part of the report may be the annual wage growth figure. Forecasts suggest the smallest increase in nearly 3 years at 3.9% year-over-year. A continued downshift in wage pressures could validate the Fed's long-running gamble that tighter monetary policy would succeed in rebalancing the jobs market without crashing the economy.
It's been a bumpy ride getting to this point, with shock 2022 inflation prints forcing the most aggressive Fed rate hike campaign since the 1980s. Central bankers raced to catch up, haunted by their errant "transitory" inflation calls and fear of a 1970s-style entrenchment of consumer and business pricing psychology.
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Policymakers pointed to robust labor demand metrics like elevated job openings and nominal wage growth running at double-digit levels as key drivers of the inflationary overheating. They argued that without a decisive rebalancing of labor market tightness and pay gains, businesses would keep jacking up prices to cover rising input costs in a self-perpetuating spiral.
Fast forward to today, and that rebalancing now appears within sight based on the latest projections. While still historically low at 4%, the unemployment rate has ticked up modestly from the 3.5% cycle trough. More importantly, the floor seems to have dropped out from under runaway wage growth over the past year.
Private sector pay metrics – often seen as a leading indicator of the government's lagging wages series – have decelerated sharply, with the Atlanta Fed's tracker recently printing at just 4.6% annually. If confirmed in June's jobs data, this would represent a dramatic downshift to levels more consistent with the Fed's 2% inflation target over time.
None of this is to say the Fed's work is complete or a rate cut is imminent. Officials have consistently emphasized their resolve to return inflation fully to target before pivoting to an easier policy stance. Several more months of moderating wage and price data will likely be needed before the central bank is convinced that victory over excessive pricing pressures is at hand.
But if wage growth continues to moderate from June's projected sub-4% level, it may mark the death knell for "wage-price spiral" alarmism. After over a year of aggressive monetary policy tightening, the economic makings of a 1970s-style inflationary psychology event now look to be firmly in the rearview mirror.
So pour yourself a cocktail this weekend and toast to at least one major positive sign that we've reached Peak Inflation. With luck, your purchasing power may finally be set to stabilize once again if these latest trends hold.