Rising share prices are not inflationary per se. But new highs in stocks, combined with record house prices, are putting some downward pressure on the labour force participation rate. Excess retirements in the US are now estimated to have spiked to 2.7mn at the end of last year, rebounding from around 1.5mn in mid-2023.
The US labour force participation rate for those aged 65+ was 19.1% in January, down from 20.8% in February 2020. For those aged 55+, the participation rate had fallen by more, from 40.3% to 38.5% over this period. The recovery in the overall participation rate peaked in August last year and has now resumed its secular downtrend. An important ‘release valve’ for wage pressures may have run its course.
Demographic challenges are ubiquitous across developed economies, and interest rate hikes have done little to slacken labour markets even where the impact of monetary policy was projected to be most pronounced. The Eurozone is a case in point, running a much tighter fiscal policy than in the US. Yet the unemployment rate dropped to a record low of 6.4% in January. Employment is hitting new highs, including in Spain and Germany. The Eurozone services CPI increased 0.49% m/m and by a 3-month annualised rate of 4.75% in February.
Whether the Fed cuts once or twice, or simply holds, is less important than what happens at the long end of the yield curve, which needs to head back towards 5% for conditions to become restrictive again. Long-dated Treasuries have further to fall. If anything, the disconnect between the bond market and the strength of the US economy has grown since the last CPI report. The performance of cryptocurrencies adds to the weight of evidence, that monetary policy remains too loose.
