Rising wages spell higher interest rates in the US

Higher wages are on the way in the US as the labour market keeps tightening. But upward pressure on wages implies upward pressure on inflation and higher interest rates to subdue it.

New data on the US labour market reveals that wage growth looks promising. "But it's not yet great again," as Gina Chon puts it on Breakingviews. Job creation in August was strong. Last month the US economy added 201,000 jobs, while the unemployment rate stayed at 3.9%. Meanwhile, hourly earnings rose by 2.9% year-on-year, the fastest pace since 2009.

"The problem is, that barely matches inflation," says Chon. The consumer price index rose 2.9% in the year to July. The US economy is in good shape, and the tax cuts will provide at least a temporary boost, Chon notes. "As yet, though, America's workers still aren't getting enough of the benefit to see areal financial difference."

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Trump has argued last year's corporate tax cuts will increase household income by $2,000 in the next two years. However, only 27% of households in the lowest-income quintile will receive a tax cut this year, whilemost will see no material change, according to the Tax Policy Center.

But higher wages are on the way as the labour market keeps tightening, says John Authers in the Financial Times. Only onein25 of those wanting a job are unemployed; "not long ago it was one in ten". Upward pressure on wages implies upward pressure on inflation and dearer money to subdue it, so the Federal Reserve will keep raising interest rates. Of course, "that is not what people in the emerging-market world want tohear".




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