The wages of our inflationary sins

Research evidence excerpt

The wages of our inflationary sins

we expressed in our year-ahead 2026 outlook is short-circuit the inflationary consequences of rising wage

right, the cyclical uplift will continue through 2H26—driven inflation. While DM productivity growth has come off

less by the implementation of productivity enhancing AI- last year’s boil, we expect it to firm again over the coming

technologies and more from a recovery in labor markets. year and settle around 1%ar. If wage growth runs around

Combined with building supply constraints in both labor and 3%ar, unit labor costs would expand at a manageable

goods production, the demand pickup could keep global infla- 2%ar growth pace (Figure 3).

tion stuck near 3%ar through 2H26 and into 2027.

Figure 3: Wages, productivity, and unit labor costs, DM

Figure 1: DM unemployment rate and wages %oya; fcst 2Q26-4Q27

Unit labor %; Fcst 3Q26-4Q27 %oya; incl. 2Q track. est. 6 Fcst costs

0 Fcst 5 Wages Unemployment rate

(inverted) Wages 4 2 4

2 4

6 0

2 Productivity 8 -2

10 1 00 02 04 06 08 10 12 14 16 18 20 22 24 26

00 02 04 06 08 10 12 14 16 18 20 22 24 26 Source: National sources, J.P. Morgan. Details on request.

Source: National sources, J.P. Morgan; Dev Mkt recession bars. Details on request.

The case for a flatter Phillips curve is plausible. The rapid

This note examines the impulse from labor market pressures wage inflation of recent years may have owed less to supply-

on DM core inflation. As the energy shock fades (notwith- demand pressures and more to headline inflation pressures

standing the recent intensification of the Middle East con- boosting wage demands. With the surge in inflation con-

flict), the labor market recovery is coming into sharper relief. tained, the old relationship could reassert itself. Moreover,