What happens to inflation is probably the biggest question markets face over the next year. If it starts to rise, interest rates will rise faster than the market currently expects putting upward pressure on the US Dollar and (depending on just how fast they rise) downward pressure on US stocks.

We have seen plenty of green shoots when it comes to inflation over the past couple of years. They have all turned out to be false alarms.

However, as the job market continues to fall, it may pay to keep an eye on developments. It’s just possible the Fed will turn out to be correct in its expectation that inflation will gradually rise to its 2% target.

This week there were a couple of interesting developments. Labour productivity rose 3% in the third quarter. This was a big turnaround from the stagnant productivity seen a year ago. This could be significant because productivity (the amount workers produce) is one of the main factors influencing real wage increases. If there is a significant increase in the amount workers produce (due to technology advances and other factors) then the amount they are paid tends to follow

The other thing that caught my eye was a very strong read on US consumer confidence. As part of this we have seen a big improvement in the number of people who think work is plentiful over recent times. This could be an early sign of some tightening in the labour market and would again point to the possibility of wage rises on the horizon.

Wage rises are a key driver of inflation – green shoots.

 A strong rebound in tonight’s job data would feed into these possibilities