The Treasury market remains vulnerable to further upside surprises in inflation going into the summer.
The ‘transitory’ nature of these price moves will be hotly debated. The Shanghai containerised freight index has proved that calling a top for current supply chain disruptions is fraught.
However, the biggest risk to inflation lies with wages. Rising wages combined with accelerating goods inflation will be a potent mix for policymakers to deal with.
Company announcements on wage hikes will become increasingly important to monitor. Recent press releases have unveiled chunky wage increases.
Wage indicators adjusted for composition effects have been resilient to the pandemic. The q/q rise (+0.99%) in the wages & salaries component of the ECI in Q1 this year was the strongest in 20 years.
It is perhaps surprising that the recovery in labour market demand has been so swift. The shakeout in the labour market that has accompanied previous recessions has simply not come to pass.
This may embolden the unions and the Biden administration, which will push hard for further wage increases, particularly from the pandemic ‘winners’.
