The labor market will set inflation on a ‘rollercoaster’ that will weigh on stocks and the economy, BlackRock says

  • The labor market is about to put inflation on a “rollercoaster,” according to BlackRock strategists.
  • That’s because rising wages can stoke inflation, which raises the risk of rebounding prices.
  • “We believe this structural labor shock is poised to take over as the driver of inflation as the pandemic-driven spending mismatch unwinds.”

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The labor market is bound to set inflation on a “rollercoaster,” which will weigh on stocks and the economy, according to BlackRock.

The world’s largest asset manager rang the alarm on a structural shift in the labor market, with the pandemic job recovery masking weak growth over the past few years. 

According to the firm, there are around 4 million fewer workers today in the US than there would have been if the job market kept growing at its pre-pandemic pace. That’s kept the competition for workers among businesses strong, which has fueled wage growth.

But rising wages could spell bad news for corporate profits and the overall economy. That’s because money doled out to workers is now eating a greater share of corporate revenue, which is likely to weigh on stock prices.

Higher wages have a hand in stoking overall inflation in the economy. That raises the risk of a super-rare “full-employment recession,” strategists said, a situation where economic activity winds down despite the labor market remaining strong.

Average hourly earnings rose 4.4% year over year in July, the same rate as June. Meanwhile, consumer inflation accelerated to 3.3% in July from 3% in the prior month.

“We believe this structural labor shock is poised to take over as the driver of inflation as the pandemic-driven spending mismatch unwinds,” BlackRock strategists said in a note on Monday.

“We see inflation on a rollercoaster as the labor shock takes over from the spending mismatch. If companies try to protect margins from these wage pressures in a stagnant economy, that could add to inflation pressures and result in even higher central bank policy rates,” they later added. 

Strategists have warned for months that investors are entering a new regime of volatility, as higher interest rates mean liquidity is no longer free-flowing in the market.

But while BlackRock has warned of a US recession, other strategists on Wall Street have dialed back their recession predictions and warmed up to the possibility of a soft landing.

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