UBS: Price increases should allow Fed to raise rates

Union Bank of Switzerland’s analysis team suggest that the Fed will likely raise interest rates when inflation is over 2%.

Key Quotes

“Wage growth is an inflation pressure. The US labor market is very strong. Wage growth is 3.5% to 4% today.”

“Companies are not just having to pay more to attract new staff. Companies are having to pay more to stop staff from leaving. In any major economy, domestic labor costs are over 2/3 of company costs, so this matters. However, higher costs don't always mean higher inflation.”

“Companies may cut their profit margins if they're not confident they can pass costs on to customers. US profit share of the economy is at a very high level & could easily come down. UBS expects global equity earnings growth to be slower than global economic growth in 2019, which suggests profits may grow more slowly than economy.”

“US inflation today is normal, in line with its long-term average. At some point, price increases should allow Fed to raise rates. But investors might want to consider if labor cost inflation will hit profits too.”