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Inflation, Employment costs and Profits: the US evidence Investment Insights • MFN

Inflation, Employment costs and Profits: the US evidence

Many commentators worry that high wage growth will prevent inflation from returning to central banks’ 2% targets soon. But two economic forces drive a wedge between wage growth and inflation. The first of these is productivity. Since productivity is generally rising over time, wage growth will exceed inflation on average. The second is firms’ profit margins. These tend to rise when inflation picks up, as output prices then often rise faster than firms’ costs. Wage growth can be seen as one way in which the economy returns profit margins to their earlier level. In this Macro Flash Note, EFG chief economist Stefan Gerlach looks at the US data.

Stefan Gerlach

6 min read
Misinterpreting inflation and the risk of recession Investment Insights • MFN

Misinterpreting inflation and the risk of recession

Will central banks continue to push up interest rates rapidly to ensure that inflation returns to their 2% inflation objectives, at the risk of triggering recessions? The answer to that question may hinge on how they think about inflation. Conventional measures of annual inflation remain high in the US and the eurozone. Although still above 2%, alternative measures that are more sensitive to current inflation pressures are much lower, particularly in the US. In this Macro Flash Note, EFG Chief economist Stefan Gerlach concludes that while continued tight policy is warranted in both economies, it is time for both central banks to slow the speed of rate increases.

Stefan Gerlach

6 min read
The FOMC meeting: Rates have to rise further but perhaps more slowly Investment Insights

The FOMC meeting: Rates have to rise further but perhaps more slowly

At its meeting on 2 November, the Federal Reserve raised rates by 75 bps. Chairman Powell indicated that the Fed may raise interest rates several more times, but also that those increases may come at a slower pace. In addition, he signalled that the ultimate level of the policy rate will be higher than previously expected, that is, higher than the September Federal Open Market Committee (FOMC) median projections of 4.4% in 2022 and 4.6% in 2023.

Stefan Gerlach

3 min read

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