Stocks week ahead: Wages are the most important number to watch in the jobs report

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New York
CNN Business
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Investors, economists and members of the Federal Reserve will be poring over the September jobs report on Friday morning for clues about the health of the economy. But one figure may matter more than most…and it’s not the number of jobs added or the unemployment rate. It’s wage growth.

Inflation is not just a function of the price of oil and other commodities and production costs like manufacturing and shipping. How much workers take home in their paychecks is also a big part of the inflation picture.

When people have more money in their wallets (virtual or good old-fashioned leather ones), they tend to be more willing to spend it. That gives companies additional flexibility to raise prices.

Average hourly wages rose 5.2% over the past 12 months according to the August jobs report. That’s down from a 2022 peak growth rate of 5.6% in March.

So how aggressively will the Fed need to raise rates going forward? A lot will depend on whether wage growth continues to slow.

Companies can’t raise prices as much if workers are making less or they risk big destruction in demand.

The problem is that wage growth above 5% is still historically high. Before the pandemic, wages typically rose just 3% year-over-year. But labor shortages, due to Covid-19 and people dropping out of the workforce, shifted power from employers to employees when it came to worker pay.

That’s another reason why companies have continued to raise prices: To offset rising costs.

The government reported Friday that its preferred inflation metric, personal consumption expenditures (PCE), rose 6.2% from a year ago in August. That was lower than July’s reading.

But the so-called core PCE figure, which excludes food and energy prices, rose 4.9% through August, up from a 4.7% increase in July.

What’s more, the Fed typically is looking for just a 2% growth rate in the headline PCE number as a sign of price stability. That’s not going to happen anytime soon. In fact, the Fed’s latest forecasts suggest that the central bank thinks PCE will rise 5.4% this year, up from projections of 5.2% in June.

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