Macroscope

Global economy hinges on US wage growth as policymakers fight inflation and recession

The most important global economic indicator this year is US wage growth as worker shortages and robust demand have forced employers to raise wages

If earnings do not slow, inflation will remain high and the Fed – which effectively determines global borrowing costs – will have to keep policy tight

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Students do steel work at Ironworkers Local 29 during an apprenticeship in Dayton, Ohio. The US economy has been squeezed by decades-high inflation, prompting the Federal Reserve to raise interest rates multiple times in an all-out campaign to ease demand and rein in cost increases. Photo: AFP

Nicholas Spiro is a partner at Lauressa Advisory, a specialist London-based real estate and macroeconomic advisory firm.

Published: 1:00am, 6 Jan 2023Updated: 2:26am, 6 Jan 2023

Are the world’s big central banks winning the fight against inflation? One would hope so given the scale of the damage wrought by last year’s dramatic rises in interest rates to counter the surge in prices, which was initially dismissed as temporary only to prove much sharper and more persistent than expected.

Having slowed a year after the Covid-19 pandemic erupted in February 2020, global inflation approached 10 per cent last year because of a combination of massive stimulus programmes and the commodity price shock stemming from Russia’s invasion of Ukraine.

The fastest increases in borrowing costs for decades contributed to a staggering decline in the value of global stocks and bonds last year. Debt markets were clobbered, with the average 10-year government bond yield in Group of 7 economies shooting up from 0.7 per cent to 3 per cent, according to Bloomberg data.

Yet, in the past several months, signs inflation might have peaked have become more apparent. The easing of pressures on global supply chains, falls in energy and food prices and sagging demand amid sharp increases in rates have caused prices to slow in several large economies.

Inflation in the United States eased to 7.1 per cent in November, its lowest rate in almost a year, while prices in the euro zone fell for the first time in 17 months.

In emerging markets, the average inflation rate excluding Turkey and China – prices are off the charts in the former and are a mere 1.6 per cent in the latter – has dropped to 7.7 per cent, down from 8.7 per cent in June, according to JPMorgan data.