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To Beat Inflation, Wage Growth Needs to Fall

Bob Prince, Bridgewater Associates

To lower inflation back to target and bring the economy back into equilibrium, we need to see a slowing of incomes and a rise in savings such that nominal spending is brought back in line with the productive capacity of the economy. Due to the circular relationship between nominal spending, incomes, and wages, the primary way to do this is to tighten enough to induce layoffs or raise the savings rate by enough and for long enough that market forces bring down wages. So how low does wage growth need to go to sustainably keep inflation at target over the long term, assuming the savings rate stabilizes at some higher level after tightening has reduced credit growth and raised savings? It needs to be brought down to a level such that, in combination with other sources of income, the total amount of income growth is consistent with target inflation plus productivity growth, which today is around 2–2.5%.

Declining Rents Could Push Economy Close to Deflationary Territory

David Rosenberg, Rosenberg Research

We are told, with inflation having declined to 3%, that we are into a new era of “sticky” inflation. That getting from 3% to 2% will be a lot tougher than from 9% to 3%. And they point to the elevated core rate of inflation which is only elevated because 40% of the index is centered in rental rates, which contains leases that were signed when the apartment sector was drum-tight two and three years ago.

In real-time, rents are deflating and as the prior high numbers fall out of the calculation, the YoY trend by this time in 2024 will decline to zero or even lower (as per the recent San Fran Fed report) and this will end up taking headline and core inflation well below 1%, despite anything else that may be happening, including any further production curbs out of OPEC+.

If Policy Rates Have Peaked, So Too Have Bond Yields

Jeff Schulze, Director, Head of Economic and Market Strategy at ClearBridge Investments

The 10-year Treasury yield has likely already made or is near its peak. The 10-year rose over 100 basis points from its April lows to its recent high in August, with just over half of that occurring between mid-July and late August. History suggests this move may be nearing its end. The 10-year Treasury yield typically peaks around the time of the final rate hike, with a range of four months prior to five months following the peak in the fed-funds rate. If history is a guide, the 10-year is likely to stabilize and decline in the coming year, which would have important ramifications for equity valuations and market leadership.

The Next Recession Will be Highly Inflationary

Jeff Gundlach, CEO DoubleLine Capital