Will the US Labor Market Heat Up... Risk of Wage-Driven Inflation Reemergence in the Second Half of This Year

Analysis suggests that if the current trend of the U.S. labor market boom continues, wage-push inflation could reemerge in the second half of this year.

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Seunghoon Lee, a researcher at Meritz Securities, explained in a report released on the 14th, "In December last year, the number of non-farm payrolls in the U.S. increased by a whopping 256,000 compared to the previous month, significantly exceeding the market consensus of 165,000, while the unemployment rate fell to 4.09%, below market expectations," adding, "All characteristics observed during a labor market boom appeared."

The characteristics observed during a labor market boom are as follows. First, labor supply expanded in healthcare, leisure, and government sectors. Second, job seekers can find employment within a short period. Lastly, bad unemployment such as contract expirations or layoffs decreases, while good unemployment such as voluntary job changes increases. Amid these conditions, wage growth slowed down, leading Seunghoon Lee to judge that the U.S. labor market scored a perfect 10 out of 10 in December last year.

The key issue is whether there will be further improvement in labor supply and demand. Lee believes that if this point improves, it will be difficult for wage growth to slow down in the second half of the year. This is because wages are the most lagging indicator among labor market metrics. Considering that the ratio of job openings to unemployed persons had been trending downward until September last year, he forecasted that wage growth would slow down until April or May this year with an 8 to 9-month lag, but wage pressure could intensify from June to September this year.

He stated, "If labor supply and demand continue to tighten beyond the improvement seen in December, the wage growth expansion and service price pressure stimulation path will reactivate throughout the second half of the year, making it difficult for the U.S. Federal Reserve (Fed) to ease tightening," adding, "Financial markets are paying attention to this risk, and futures markets have begun to price in the next rate cut in September."

However, from the employment trends in January this year, all time series related to the Business Employment Dynamics survey (such as non-farm employment) have been adjusted, so the labor market must be assessed using the new statistics. He said, "Our current Fed outlook assumes that the labor market will continue to normalize and that the ratio of job openings to unemployed persons will fall below 1 around August this year."

The next rate cut is expected in June. The researcher said, "Although the Federal Open Market Committee (FOMC) in January will be hawkish, expectations for a rate cut will reemerge only if the inflation rate calculated by the Personal Consumption Expenditures (PCE) price index trends downward for several months," adding, "The side effects of the higher-than-expected market interest rates could rather exacerbate rollover risks for government and corporate bonds or vulnerabilities in consumer credit in the second half of the year."

He continued, "If disinflation progresses slowly again in the second half of the year, our base scenario is that the Fed will pay attention to financial stability and cut rates by 75 basis points after June within this year."

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