Wage Data Bucks the Inflation Narrative

Financial markets are desperately looking for direction these days.

One issue rattling markets is the constant debate over the state of inflation. Inflationary pressures have accelerated this year, but over the past month, investors have braced for the threat of deflation. As shown in the LPL Chart of the Day, breakeven rates, or the difference between the yields of nominal Treasuries and those of Treasury Inflation-Protected Securities (TIPS), plunged last month. The 2-year breakeven rate is now sitting near a 16-month low.

Inflation Expectations Dive Amid Healthy Wage Growth

Investors are digesting several headwinds right now, and global growth and deflation worries have intensified amid a swift sell-off in crude. However, we encourage investors to focus on economic data instead of headlines. Data released this morning showed average hourly earnings rose 0.2% month over month.

“Today’s jobs report showed healthy wage growth continued through last month,” said LPL Research Chief Investment Strategist John Lynch. “Though inflation concerns may surface occasionally, we will continue to pay close attention to wage growth as a barometer for domestic inflation.”

We believe the current level of wage growth is sustainable, and modestly accelerating wages are a boon to economic output. Wages also represent about 70% of business costs, so recent pay growth trends should help to keep inflationary pressures at a manageable level.

Pricing pressures are also growing at a steady, but manageable rate. Consumer prices, represented by core personal consumption expenditures (PCE), climbed 1.8% year over year in October, just below the Federal Reserve’s target of 2%. Producer prices, via the Producer Price Index (PPI), rose 2.2% in October, one of the highest readings for the gauge since 2012.

The rest of November’s jobs report confirmed the labor market remains solid. Non-farm payrolls rose 155K in November, below consensus expectations for 198K growth but still a solid figure, particularly at this stage of the business cycle. The unemployment rate remained at 3.7%, a 49-year low.


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Treasury inflation-protected securities (TIPS) can help eliminate inflation risk to your portfolio as the principal is adjusted semi-annually for inflation based on Consumer Price Index – while providing areal rate of return guaranteed by the U.S. Government. Treasury-Inflation Protected Securities, or TIPS, are subject to market risk and significant interest rate risk as their longer duration makes them more sensitive to price declines associated with higher interest rates.

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