Great Graphic: US and UK Wages

The UK's average weekly earnings report today has excited the market.  Sterling rallied strongly, and investors expect the BOE to lift rates a bit earlier than prior to the report (June 2016 rather than August/September 2016).  

The labor markets in the US, UK, Germany, and Japan have seen slack dramatically reduced.  Yes, there is still scope for more cyclical improvement but there is preliminary signs of increased wage pressure.  

This Great Graphic, created on Bloomberg, shows US and UK wages.  The white line is the US average hourly earnings on a year-over-year basis.  The yellow line is the UK average weekly earnings (3-month year-over-year), excluding bonuses. 

Commentators often seen the US as having the more flexible labor market.  Yet UK labor earnings seems considerably more volatile than the US experiences.  Earnings growth in the UK has risen to the highest level since 2009.  The pace of hourly earnings growth in the US is at the upper end of where it has been since the economic recovery began. 

Central bank officials appear to implicitly accept the Philips Curve; that tighter labor markets will boost inflation over time.  In the US, the argument runs something like this:  policy makers can focus on core inflation because over time, the data shows that the headline rate converges to the core rate and not the other way around.  In turn, the key to the core inflation is wages, which business pass through to their consumers.   

Yellen has indicated that provided the slack in the US labor market continues to be absorbed, she can be "reasonable confident" that inflation will move toward the Fed's 2% target over the medium term.   The bar is not "beyond a reasonable doubt" as it is in criminal cases,  or  even the lesser legal threshold in civil cases, "preponderance of evidence".   

 The IMF and World Bank want the Fed to wait until inflation actually rises.  While this has a certain appeal to it, the problem is the lag time.  Some Fed officials have framed the issue as early and gradual or late and sharper.  The IMF and World Bank are thinking about the present.  We suspect the Fed's leadership is thinking about future implications. 

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