The Fed’s tone next week will depend on how policy-makers put a number of pieces together
As the U.S. economy reopened from the pandemic in 2021 and companies realized the pricing power at hand from supply shortages and consumers’ eagerness to spend, corporate profits spiked to claim the highest share of national income in 60 years.
Labour costs, meanwhile, rose faster than expected, with the Employment Cost Index increasing 1.2 per cent for the months from January through March versus the 1.1 per cent projected by economists in a recent Reuters poll. The Fed’s tone next week, however, will depend on how policy-makers put a number of pieces together. Inflation is improving more slowly than expected, for example, but there are some signs demand is beginning to cool. The ongoing increases in employment costs could be a sign the job market remains too tight, or, in an alternate view among some Fed economists and officials, be seen more as a correction that won’t necessarily feed higher inflation.
“You have to go back several decades to see a time when the profit share of price has been as high as it is now,” John Robertson, an economist and senior policy adviser at the Atlanta Fed, told Reuters earlier this month. “If profit margins were to come back down to the normal, pre-COVID level, that would give some room for labor’s share to increase and still have everything work out” for inflation to return to target.
To some, the current low unemployment rate of 3.5 per cent, coupled with the fact that inflation has become more concentrated in labour-intensive service industries, is reason for concern. “The one thing that I think we’re spending too much time looking at is wage growth as an indicator of prices,” Chicago Fed President Austan Goolsbee told CNBC this month, citing recent research by Chicago Fed staff. “They’re a lagging indicator...When people are looking at what’s happening to wages now, that’s more reflective of what happened to prices six months ago.”
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