Page 14 - ISQ October 2022

INVESTMENT STRATEGY QUARTERLY

Sector Wages and Inflation

Despite higher wages, the impact of inflation gave workers
in most sectors of the economy a pay cut.
10%
8%

6%
4%

2%

0%
Leisure and hospitality Information Education and health Construction Mining and logging Goods-producing Financial activities Durable goods Manufacturing Nondurable goods Other services

Services Goods CPI
Source: FactSet, as of 20/09/2022

As we have written in the past, reforming our immigration system
will also be of great help in moving both the rate of unemploy- KEY TAKEAWAYS:
ment and the labour force participation rate higher because the • The Fed and the market are going to have a tough time
pool of available workers will increase. This is especially true for during the last quarter of the year with the economy
the service sector, specifically for the leisure and hospitality showing few signs of slowing down.
sector of employment, which has seen the largest increases in
nominal wages and salaries during the last year or so. This should • The most important detail of the August employment
help reduce the pressure on wages, which is one of the reasons number was the increase in the labour force partici-
why inflation has remained higher for a longer period. pation rate, which pushed the rate of unemployment
from 3.5% in July to 3.7% in August.
BOTTOM LINE • The best-case scenario, for both the Fed and the
These issues are not small and are very difficult for only one insti- markets, is for the labour force participation rate to
tution like the Fed to tackle, because some of them are not within continue to go up so unemployment continues to
its sphere of influence. However, the way in which these issues increase. An increase in the labour force participation
are solved will ultimately determine how high the Fed must go in rate will help reduce the pressure from higher wages
terms of interest rates, and for how long as well as how deep a on inflation which, today, seems to be at the top of
recession will be needed to tamp down the inflation monster. We Fed officials’ concerns.
believe that the US economy could go back to pre-pandemic con- • The risk is that the Fed overplays its hand and
ditions with lower rates of inflation once all the supply conditions increases the federal funds rate more than that would
come back to more normal levels. be necessary to bring inflation down.

• We believe that the US economy could go back to
pre-pandemic conditions with lower rates of inflation
once all the supply conditions come back to more
normal levels.

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