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The pound-to-dollar exchange rate experienced its largest intraday decline in a month on Friday after being reversed when the dollar rallied in apparent response to data showing that U.S. inflation rates were being supported at high levels by the fastest growing wages in decades.
The dollars were widely bought off, leading to sharp declines for all currencies against the greenback after the Bureau of Economic Analysis said its employment cost index rose 1.3% in the third quarter, a change due to an annualized increase of 6% in the number of workers. wages.
âThe 1.3% jump in the ECI title is the biggest in 31 years; we feared going beyond the consensus, but it is alarming. The overall increase was driven by the largest increase in wages since the third quarter of 1982, rising 1.5%, âsaid Ian Shepherdson, chief economist at Pantheon Macroeconomics.
âWe think it’s entirely reasonable to expect wage growth to slow as labor supply rebounds, which should be clear in the fourth quarter. If that doesn’t happen and wage growth continues at this rate, then: Game Over. âTransientâ should be dropped and the Fed would have no choice but to start raising as early as June, âShepherdson also said.
Above: Pound-to-dollar rate and Euro-dollar rate at 15-minute intervals.
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Shepherdson told clients in a note after the publication that so-called labor productivity would need to increase 3% on an annualized basis in order to prevent 6% annual wage gains from adding to the inflation, which is the type of outcome central bankers refer to. like a âwage-price spiralâ.
In other words, this is exactly the sort of outcome that could trigger interest rate hikes from the Federal Reserve (Fed), which will announce its November monetary policy decision next Wednesday and may well put update its interest rate forecast as a result of these and other recent figures.
In the same report, the Bureau of Economic Analysis also said that the Fed’s preferred measure of inflation rose from 4.2% to 4.4% in September, further raising it above the average target of 2%.
âThe Fed’s preferred price measure, PCE base prices, held steady at 3.6% yoy in September, below consensus forecast for it to warm up slightly to 3.7% yoy . Compared to its pre-pandemic level, which eliminates base effects, it still looked warm at 2.7% on an annualized basis, supporting the Fed’s pending decision to start cutting bond purchases, âhe said. said Katherine Judge, economist at CIBC Capital Markets.
The personal consumption expenditure price index remained unchanged at 3.6% if food and energy costs are excluded from the measured price basket, although it is not clear that this would matter much to the economy. Fed in light of wage developments.
“The risk is that the persistence of high inflation will start to lead policymakers to set prices and wages to expect excessively high rates of inflation in the future,” said the Fed chairman. , Jerome Powell, at a panel discussion at the South African Reserve Bank Centenary Conference on October 22.
âSo we need to make sure that our policy is positioned to meet the plausible set of outcomes and we will monitor carefully to see if the economy is moving as expected and our policies will need to adjust accordingly,â Powell also said. noted.
Next week, the Fed is expected to broadly announce its intention to phase out its $ 120 billion-per-month quantitative easing program in the months through 2022, while the Fed’s latest dot chart forecasts individual policy makers suggested it could start raising interest rates within the year. -end 2022.
However, only one interest rate hike has been suggested as likely, which would push the Fed Funds rate range to 0.25% to 0.50%, although the danger is that inflation and developments of wages lead to a higher number of rate hikes that occur sooner than financial hikes. the markets anticipate.