With the ECB looking to raise rates in early April, and the Bank of England under pressure to do so, it seems like the Fed (excluding the Bank of Japan) will soon be the last man standing in terms of major developed world banks and easy money policy.
But what’s the Fed waiting for? There are three inflation data points the Fed is watching, two of which are worrying, and one that says a rate hike is a no go, according to Societe Generale’s Aneta Markowska.
Markowska cites the sticky price index, consumer inflation expectations, and labour costs as the big three. The sticky price index (a look in at producer’s inflation expectations) and consumer inflation expectations are moving higher.
But labour costs are not, according to Markowska:
This is important, because price pressures without wage pressures are not seen as sustainable. Therefore, in order to be fully convinced that inflation is building, the Fed will need to see confirmation in the labour market. This is where inflation pressures are still lacking and why the Fed is in no rush to tighten. Hourly wages are growing at just 2% which is in line with previous cyclical lows. Unit labour costs are flat year-over-year. Nonetheless, labour costs are either stabilizing or turning, and with the projected drop in the unemployment rates, these trends should continue.
As you can see, labour costs are not yet rising. Thus the Fed isn’t likely to raise rates until the middle of 2012, according to Markowska.
Photo: Societe Generale
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