Macroeconomics

US wages, tariffs raise inflation risks

10 February 2025 • 3 mins read

US President Donald Trump speaks after signing a series of executive orders including 25% tariffs on steel and aluminum in the Oval Office at the White House on 10 February 2025 in Washington, DC. AFP.

January’s jobs report shows the US labour market remains strong. Payrolls rose less than expected by 143,000 due to wildfires but unemployment fell to 4.0% and average hourly earnings firmed 0.5%.
At the same time, President Trump keeps announcing more tariffs. The US will set 25% taxes on steel and aluminium imports after imposing extra 10% tariffs on all Chinese exports last week.
America’s firm labour market and widening tariffs threaten to make US inflation rebound again.
This week, January’s consumer price index (CPI) data is likely to show US core inflation staying well above the Federal Reserve’s 2% target at 3.2%. If tariffs lift inflation further, the Fed will stop rate cuts, causing long-term Treasury yields to rebound too.

January’s jobs report shows the US labour market remains strong.

Source: Bank of Singapore, Bloomberg

Payrolls rose less than expected by 143,000 due to last month’s wildfires but the prior two months’ data were revised up by 100,000 to show large gains of 261,000 in November and 307,000 in December. Thus, over the last three months, the US economy has generated 237,000 new jobs on average, still well above pre-pandemic levels.

Unemployment also fell to 4.0% in January - a very low rate historically as the first chart shows - while average hourly earnings firmed by 0.5% last month. US wages are therefore growing annually by 4.1%, a pace that if sustained will keep inflation well above the Federal Reserve’s 2% target.

Source: Bank of Singapore, Bloomberg

At the same time, President Trump keeps announcing more tariffs. Today, the US will impose 25% taxes on steel and aluminium imports after setting extra 10% tariffs on China’s exports last week.

America’s firm labour market and widening tariffs threaten higher inflation. This week, January’s consumer price index (CPI) is set to show core inflation staying above the Fed’s 2% goal at 3.2% as the second chart shows.

Source: Bank of Singapore, Bloomberg

If tariffs lift inflation again this year, then the Fed will stop reducing interest rates, leaving its fed funds rate above 4.00% as the last chart shows. Higher inflation would also cause long-term Treasury yields to rise. We thus stay cautious on duration, in line with our forecast of 10Y yields to reach 5.00% this year.

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Author:

Mansoor Mohi-uddin

Bank of Singapore