Higher wages may point overheating in the labour-market...

After increase in the hourly compensation to four-percent the case of a potential rate hike in the US looks close when the Fed meets in Dec. It shows higher wages and cost which may result in higher core inflation, a rise in wage, cost and price of manufactured products which reflect tightening in the labour market that the economy has achieved its potential and further monetary policy stance would be tightening of the capital market too because lose money-supply might increase demand for labour when the economy has reached full-employment and may result in wage cost and inflation which does reflect the reserve bank’s commitment for price-stability and the value of money and demand. The scenario clearly depicts the situation or condition the US economy is going through. The central-bank has had approached the inflation trajectory close to arrive at the hike, but the Fed index of inflation gauge has failed to turn out as expected. The consumer personal expenditure (CPE) with so low fuel prices has failed to increase inflation because of low spending and inflationary expectations have also increased savings. But, higher wages show that there is a competition to attract labour and might also indicate overheating and tightening. Labour is among the scarcest factor of production against the long-held assumption of old models of unlimited supply at a fix price or wage. The supply of labour is the prime cause of low-supply and higher prices in the short-run. Lack of skills too add to the problem of low-supply. Therefore, countries try to update its economy with innovation that increases productivity to overcome labour shortage problem and reduce cost and prices to remain competitive. Full-employment is a major supply side constraint beside food and fuel which may also signal overheating and inflation. However, CPE has been the preferred gauge of inflation for the Fed which shows lower inflation compared to the wage inflation as seen in the hourly compensation. Higher wages and prices indicate higher demand in the labour market but food and fuel prices indicate less demand pressures also due to good supply condition. The US is a developed country, but still constrained by the supply of labour also because of falling population and labour-force participation growth rate...