- We explore the risk of a further rise in oil prices after the terror attack against Israel
- Strikes have hit their highest level in 20 years in the US. We look at real wages to gauge the risk of an inflationary catch-up in pay. The UAW strike is also illustrative of the challenges of re-industrialising amid an energy transition
The disappointing inflation print for September in the US may not be too alarming. It could be mere mean reversion after a “too good” August print. Yet, we cannot exclude that a line of resistance is emerging, under a “pincer movement” from higher oil prices combined with a still tense labour market generating persistent wage pressure.
The tragedy in Israel has raised the risk that oil prices rise further. The market reaction has been measured so far, as the lack of unity of the Arab world – a difference with the 1970s – limits the ramifications through OPEC. It is a very volatile situation though as the market ponders the effect of the likely ground operation by Israeli forces in Gaza. The capacity of the US to control the escalation is going to be crucial, but that is what Joe Biden is clearly attempting.
When it comes to endogenous inflationary forces in the US, the intensification of strikes calls for attention. A key issue though is to determine whether there is still a significant real wage gap in the US which could unleash a catch-up ahead. Average wages deflated by headline inflation have been marginally exceeding their pre-Covid level since the end of last year. Non-supervisory and production workers have seen more substantial gains, and after three years of gyrations their real wage is today roughly where it should be when prolonging the trend observed between the end of the GFC and Covid. This should bring a measure of reassurance on the capacity to tame inflation.
The interest in the strike in the auto sector goes beyond the inflation issue. Indeed, we think it illustrates very well the challenges of reindustrialisation in a context of energy transition. Still, at least the US has stopped the decline in manufacturing jobs – even before IRA. This helps with the social difficulties of sectorial reallocation. People working in manufacturing may not always be able to keep their current job, but they have a higher chance to find a similar job than during the big industrial contraction of the 1990s/2000s.