In our “out of the box” series, we aim at being ahead of the current consensus narrative and think of the next theme that could drive action before anyone else has given it any noteworthy attention.

In this edition, we will elaborate on why falling inflation is the exact trigger that is needed for a lay-off cycle to commence. The relative price of labour has fallen through 2021/2022 relative to corporate end-user pricing. That is about to change dramatically in H2-2023.

Conclusions up front:

– Soft indicators of inflation are falling off a cliff. There is little doubt left about the 6-month path for CPI prices

– Wages remain stickier, which will lead to a remarked real wage growth in H2-2023 and early 2024

– The demand for labour is driven by the price of wages adjusted for consumer inflation. A rapid increase in real wages is hence a negative for the hiring cycle

Soft indicators on inflation are falling off a cliff

There is currently a “great divergence” between hard and soft data on inflation. Soft indicators are falling off a cliff as we have highlighted in recent weeks and the picture is getting increasingly uniform globally.

We received the latest survey from the European Commission today and the price expectations print (alarmingly) close to 0, which typically leads to actual inflation pressures below 2% within a 5–7-month horizon from the survey date. Soft data on inflation is falling apart swifter in the Eurozone than in the US right now.

Chart 1: European inflation to dissipate according to price surveys among price-setting companies