Image © Adobe Images

GBP/USD reference rates at publication:

Spot: 1.3694High street bank rates (indicative band): 1.3315-1.3411Payment specialist rates (indicative band): 1.3598-1.3626Find out about specialist rates, hereOr, set up an exchange rate alert, hereThe Pound-to-Dollar exchange rate saw its largest intraday decline in a month on Friday after being toppled when the Dollar rallied in an apparent response to data showing U.S. inflation rates being propped up at elevated levels by the fastest wages growth for decades.

Dollars were bought widely, leading to steep declines for all currencies when measured against the greenback after the Bureau of Economic Analysis said its employment cost index rose by 1.3% in the third quarter in a development that was driven by annualised 6% increase in workers’ wages.

“The 1.3% jump in the headline ECI is the biggest in 31 years; we feared an overshoot to the consensus but this is alarmingly big.The headline increase was driven by the biggest surge in wages since Q3 1982, up 1.5%,”says Ian Shepherdson, chief economist at Pantheon Macroeconomics.

“We think it is entirely reasonable to expect wage growth to slow as labor supply rebounds, which ought to be clear over the course of Q4. If that doesn't happen, and wage growth continues to run at this pace, then: Game Over. “Transitory” would have to be abandoned and the Fed would have no choice but to start hiking as soon as June,” Shepherdson also said.

Above: Pound-to-Dollar rate and Euro-Dollar rate at 15-minute intervals.

Secure a retail exchange rate that is between 3-5% stronger than offered by leading banks, learn more.

Shepherdson told clients in a note following the release that so-called workforce productivity would need to grow by an annualised 3% in order to prevent annual wage gains of 6% from adding to inflation, which is the kind of outcome that central bankers refer to as a “wage-price spiral.”

In other words, it’s exactly the kind of outcome that could trigger interest rate rises from the Federal Reserve (Fed), which will announce its November monetary policy decision next Wednesday and could well be likely to update its interest rate guidance as a result of these and other recent figures.

In the same report the Bureau of Economic Analysis also said that the Fed’s favourite measure of inflation had risen from 4.2% to 4.4% in September, taking it further above the 2% average target.

“The Fed's preferred prices measure, core PCE prices, remained steady at 3.6% y/y in September, below the consensus forecast for it to heat up slightly to 3.7% y/y. When compared to its pre-pandemic level, which eliminates base effects, it still looked hot at 2.7% annualized, supporting the Fed's pending decision to begin tapering bond purchases,” says Katherine Judge, an economist at CIBC Capital Markets.

{wbamp-hide start}

{wbamp-hide end}{wbamp-show start}{wbamp-show end}

The Personal Consumption Expenditures price index was unchanged at 3.6% if food and energy costs are excluded from the basket of prices measured, although it’s not clear this would matter much to the Fed in light of developments around wages.

“The risk is that ongoing high inflation will begin to lead price and wage setters to expect unduly high rates of inflation in the future,” Fed Chairman Jerome Powell said in a panel discussion at the South African Reserve Bank Centenary Conference on October 22.

“So we therefore need to make sure our policy is positioned to address the full range of plausible outcomes and we’ll be watching carefully to see whether the economy is evolving in line with expectations and our policies will need to adapt accordingly,” Powell also said.

Next week the Fed is widely expected to announce plans to gradually end its $120BN per month quantitative easing programme over the months out until 2022, while the Fed’s latest dot-plot of policymakers’ individual forecasts suggested it could begin to lift interest rates by year-end 2022.

Only one interest rate rise was suggested as likely however, which would take the Fed Funds rate range up to between 0.25% to 0.50%, although the danger is that inflation and wage developments lead to a higher number of rate rises that come sooner than financial markets are anticipating.