USA – The risk of rising inflation is limited

Investors and economists are now very attentive to the US labor market momentum. Its profile is expected to give information on the future of inflation and on the reaction of the Federal Reserve.
Since April 2014 the number of new jobs is 260 000 on average each month. It’s a pretty strong number. This new situation is expected to create new pressures on inflation that will force the Fed to change its monetary policy. Until now this equation doesn’t work. Wages momentum is not stronger in the recent past. (see here a description of the US labor market with June figures)
Inflation momentum will not come from the labor market directly even if there are a large number of new jobs. Two charts will convince you Continue reading

Spain vs France – The new match will be different from that of 1992

In September 1992 during the European Monetary System crisis, the Spanish Peseta was devalued by 32% vis-a-vis the Deutsch-mark while the French Franc’s exchange rate remained stable. This situation was the source of tensions between French and Spanish producers. The increased competitiveness of Spanish products was a source of fragility in France, mainly in the south.
Last Thursday I was at a dinner in the south of France, in Narbonne with business leaders and the recrimination was the same. Due to reforms in Spain, Unit Labor Costs’ indices (ULC) do not have the same profile on each side of the Pyrenees. We can notice this point on the chart, below. In Spain at the end of 2013, the index is 17% lower than it was in the first half of 2008. In France, it is just 2.5% lower than more than 5 years ago. (All these measures are corrected for inflation). The divergence is striking and the change in competitiveness conditions can clearly be perceived. Continue reading