There was little economic data released last week, leaving market participants focused on the upcoming FOMC meeting. The sell-off in treasuries helped maintain investors' appetite for paper last week, but supply continues to weigh on the market. Higher energy prices are already pressuring inflation indices and this pressure will intensify in the June CPI and PPI reports. The most important contributor to inflation is labor costs. May. The June report, however, is unlikely to be so kind.
Wage inflation tends to be insidious and can be difficult to stop once it gets a toehold.
As wage inflation picks up, companies are pressured to pass on these higher costs to consumers. For the last couple of years, strong top-line earnings growth and productivity gains have allowed companies to absorb higher labor and material costs, rather than passing them on. In fact, companies had little choice as stiff competition from the Internet and abroad made it practically impossible to raise prices. This, however, may be changing. First, companies are experiencing slower top-line growth as the economy weakens at the same time that their costs are increasing.