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Michigan Sentiment Rises Again

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A key US confidence statistic has just been released for the month of June. The Reuters/Michigan Sentiment Index is now reading at 82.5, this is a minor change on the May print of 81.9 and compares to a consensus estimate for an 82.0 reading this month.

Whereas business confidence readings are holding up well in the US economy there is concern mounting around a downturn in the consumer confidence data. As the Federal Reserve’s plans to create inflation take hold there is a mismatch developing between prices and wages. The Consumer Price Index is now rapidly moving in the direction of the Fed’s target level, however wage inflation is failing to match this growth rate. The upshot is that although prices are rising, consumer incomes are not and this makes life less affordable for individuals.

The lack of rising wage inflation is clear evidence of slack in the employment market. The headline unemployment level is falling but the re-skilling of long term unemployed, the proliferation of part time employment and the return to the workforce of many that had previously signed off are providing employers with plenty of supply and therefore keeping the cost of labour low.

The Federal Reserve chair, Janet Yellen, stated at last month’s FOMC policy announcement press conference that she expects a tightening in the labour market that will in turn translate into wage price inflation. The risks of this not occurring are obvious, a fall in consumer spending and a reversal in price growth activity. This is not a situation that the monetary authorities can allow to take hold at this point in the economic recovery cycle. It is however difficult to envisage what the Fed can do about the structure of the employment market, monetary policy is not a tool suited to this task, it is likely that pressure will mount on Government departments to address this, in this regard we can expect Yellen and the Fed to publically comment on this area to an increasing degree over the coming months.

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