As a trader, you must know all the things that affect your trade. Whether you trade in the Forex Review or you trade stocks, you are tasked to observe and analyze a wide variety of factors so that you can make informed decisions and make your trades profitable. Among these factors are inflation, and we’ll discuss an important part of it—the so-called wage inflation.
What is Wage Inflation?
In economics, inflation refers to the tendency of common goods and services’ prices to increase, and when this happens, it usually takes place in conjunction with a decline with the purchasing power of currencies.
Among the things that make inflation possible is the increase in the money supply. Such increase is decided and handle by central banks. Now, when there’s an increase in money supply and demand for labor, we can expect to see wage inflation, or, alternatively, wage pressure. To cut to the chase, wage inflation pertains to a rise in income.
Tracking Wage Inflation
We track wage inflation via employment reports. The Federal Reserve stated that wage inflation is taken as a major factor to both employment and inflation. Thus, it also plays a large role when it comes to the Fed’s decision to raise interest rates—or not.
Generally speaking, when we track wage inflation, we are trying to figure out whether there exists a wage pressure in the economy or not. Perhaps you have noticed, the central banks pursue quantitative easing with the view of lifting up the economy. Now you’re getting a grip on the trickle-down theory.
Trickle-down theory refers to the idea that financial advantages of big businesses and corporations will eventually trickle down to smaller businesses, workers, and consumers.
Wage Pressure, how does it affect a trader?
It is quite imperative for traders to pay close attention to the Fed and the Fed’s next monetary policy move. Central banks are focused on the employment health of an economy, along with inflation, and inflation is a sign of demand. In other words, wage inflation serves as the crossroad of two major components for central banks.
When wage inflation starts to rear its head, it is possible that an interest rate hike is to be announced. Meanwhile, when you see a steep dive in wage inflation, it’s possible that there will be an easy monetary policy, which tends to weaken a currency. A weakened currency means you have a good selling opportunity at hand.
If wages are increasing, and the central banks see this, you can expect that the central bank will raise rates earlier that everybody anticipates.
For instance, in 2016, the United Kingdom’s average weekly earnings report brought the market to start pricing in a summer rate hike by the Bank of England versus a late 2016 hike before the announcement. This made the British pound to increase extremely against the US dollar, euro, and Japanese yen, among other currencies.
Wage inflation is just one of the lesser-popular words and concepts in the Online Trading Platform world. Nonetheless, it is still important to know what it is and how it works. This is why we have other economic indicators that we should always carefully analyze if we want to make our trades profitable.