Wage Growth Peaked Four Years Ago. Two Analysts Say the Fed Should Cut in September.

The Number Everyone Is Citing, and Why It May Not Mean What They Think

Headline CPI printed 4.2% year-over-year for May, according to Lance Roberts of RealInvestmentAdvice.com. That represents the highest reading since April 2023, and the 10-year Treasury briefly punched above 4.6% on the release before pulling back.

Energy accounts for the bulk of it. Roberts says energy ran +23.5% over the past twelve months, driven by the Iran conflict, and that alone accounted for roughly 60% of the monthly all-items gain. Strip that out and the picture looks considerably different.

The Wage-Leads-CPI Argument

Roberts's core thesis is structural, not cyclical. Since 1985, wage growth has led CPI peaks by three to seventeen months in every single inflation cycle he tracked. The relationship held through the dot-com era, the housing boom, the post-Covid spike, and every turn in between.

The mechanism is straightforward. Tight labor markets show up in payroll data before that demand pressure transmits into consumer prices. Once wages start rolling over, CPI follows, typically within that three-to-seventeen month window.

Wage growth peaked roughly fifty months ago. By Roberts's framework, the May CPI number is lagging confirmation of old demand, not a signal of new inflationary pressure building underneath.

Why the 1970s Comparison Fails

The doom scenario — Paul Volcker rerun, 19% fed funds rate, union-driven wage-price spiral — depends on institutional conditions that no longer exist, Roberts argues.

Volcker broke the spiral in 1981 precisely by holding rates at that extreme long enough to collapse union bargaining power and kill cost-of-living adjustment clauses in labor contracts. Globalization then pulled tradeable-goods prices toward the global marginal cost of production. The architecture that made wages chase prices in the 1970s was deliberately dismantled.

Second, the Fed earned credibility over the following two decades. Once workers believed the central bank would tolerate a serious recession to stop inflation, they stopped pricing future inflation into current wage demands. The Phillips Curve — the old tight-labor-markets-cause-inflation model — stopped working as a predictive tool.

Roberts is explicit: the causation inverted after 1985. Before that, CPI ran first and workers chased it. After that, wages lead and prices follow. The current data fits the post-1985 regime, not the pre-1985 one.

The Jobs Report Makes the Rate-Cut Case Stronger

Peter Tchir of Academy Securities, writing via ZeroHedge, has been calling for a Fed rate cut in September. The most recent jobs report, he argues, reinforced that view.

Tchir describes the headline jobs number plus revisions as negative on net. The private sector underwhelmed. Unemployment fell, but only because the labor force participation rate dropped by 0.3 percentage points, not because people found work. A shrinking participation rate is not a sign of labor market strength.

After the data dropped, Bloomberg Radio's Tom Keene told Tchir on air that his September-cut forecast "looked smarter after the jobs data than it had before," according to Tchir's account of the interview. MarketWatch separately noted the exchange.

The Official Inflation Data Is Also Under Challenge

Tchir raises a separate issue: whether the official CPI methodology is even tracking reality accurately. He says he has not heard compelling rebuttals to two specific critiques.

First, the Cleveland Fed's rent metrics may be more accurate than what flows into the official CPI shelter calculation. Second, Truflation — an alternative real-time inflation index — likely deserves more attention than it currently receives from policymakers and financial media.

His read: official data overstated inflation post-Covid, contributing to the affordability crisis, and is now overstating inflation in the other direction. If that is correct, the Fed is already behind on cuts, not behind on hikes.

The Strongest Counterargument

The hawks are not wrong to be cautious. Energy price shocks from geopolitical conflict are real and can become self-reinforcing if they persist long enough to affect inflation expectations. A 4.2% headline print is not nothing. If the Iran conflict deepens and energy stays elevated, the historical lag between wages and CPI shrinks in relevance. The shock is external, not demand-driven, and the Fed faces a genuine stagflation dilemma. Critics of the September-cut view would point out that cutting into an energy-driven inflation spike risks signaling the Fed has abandoned its 2% target, which is precisely how Volcker-era credibility gets destroyed.

That concern is legitimate. The counterpoint is that the Fed cannot control oil prices with interest rates, and tightening into a supply shock crushes demand without fixing the supply side.

What Actually Happens Next

The September Federal Open Market Committee meeting is the next concrete decision point. Tchir says he likes 2-year Treasuries here, given the gap between what markets are pricing and what he expects the Fed to actually do.

The unresolved question is whether the energy-driven CPI spike stays isolated or begins feeding into wage demands — the specific transmission mechanism that Roberts says has been broken since 1985. If wage growth in the next two to three monthly reports shows re-acceleration, the lag thesis weakens considerably. If wages continue their current trajectory, the September cut case strengthens with each subsequent print.