A boom in spending has stirred fears of economic overheating, which has coincided with a surge in commodity prices and a lift in traditional inflation metrics. Europe’s economy is finally turning the corner, leaving its double-dip recession behind. Meanwhile, interest rates have been in a holding pattern over the past month despite inflation fears, suggesting the bond market has already discounted much of the rebound in the economy since last year.

U.S. stocks and economy: Overheating chatter

As we move into the summer, the pace of economic growth remains robust, notwithstanding a weak April jobs report. Gross domestic product (GDP), although a lagging indicator, grew at an annualized quarter over quarter rate of 6.4% in the first quarter. That undercut economists’ consensus estimates slightly, but much of the drag was due to inventories—consumption was quite strong, growing at a 10.7% rate.

Much of the strength is rightly attributed to the fiscal aid that has been injected into the economy. The concurrent boom in spending has stirred fears of economic overheating, which has coincided with a surge in commodity prices and a lift in traditional inflation metrics.

While prices have generally increased, much of the rise has been due to base effects, given that metrics like the consumer price index (CPI) are measured relative to the prior year—which, at this point, was when the economy was broadly shut down. Sustained inflationary pressures have historically come from a severe tightening in the labor market, which pushes up wages to a significant degree—generating the type of “wage-price spiral” inflation that became systemic in the 1970s.

There was a spike last year in average hourly earnings, but that was due to the drastic loss of lower-paying jobs, which kept a large number of high earners in the equation (which is a simple average) and artificially boosted the index. With lower-paying jobs now coming back, the gauge has reversed markedly, as you can see in the chart below.

Average hourly earnings spiked last year as lower-wage jobs were lost

Source: Charles Schwab, Bloomberg, Bureau of Labor Statistics (BLS), as of 4/30/2021. The Employment Cost Index (ECI) is a quarterly economic series published by the Bureau of Labor Statistics that details the growth of total employee compensation. The index is prepared and published by the Bureau of Labor Statistics (BLS), a unit of the United States Department of Labor.