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Investors, economists and Federal Reserve members will be poring over the September jobs report Friday morning for clues about the health of the economy. But one number can be more important than most… and it’s not the number of jobs created or the unemployment rate. It’s wage growth.

Inflation isn’t just a function of the price of oil and other commodities, as well as production costs like manufacturing and shipping. How much workers take home in their paychecks is also a big part of the inflation picture.

When people have more money in their wallets (virtual or good old-fashioned leather wallets), they tend to be more willing to spend it. This gives companies additional flexibility to raise prices.

Average hourly wages rose 5.2% over the trailing 12 months, according to the August jobs report. That’s less than a peak growth rate of 5.6% for 2022 in March.

So how aggressively will the Fed have to raise interest rates in the future? Much will depend on whether wage growth slows further.

Firms cannot raise prices as much when workers earn less, or they risk major destruction of demand.

The problem is that wage growth of over 5% is still historically high. Before the pandemic, wages typically grew just 3% year over year. But labor shortages due to Covid-19 and people retiring from the workforce have shifted the power from employers to workers when it comes to paying workers.

It’s another reason companies have kept raising prices: to offset rising costs.

The government reported on Friday that its favorite inflation measure, personal consumption expenditure (PCE), rose 6.2% in August from a year earlier. That was lower than in July.

But the so-called core PCE figure, which excludes food and energy prices, rose 4.9% through August, up from a 4.7% rise in July.

Additionally, the Fed typically only expects a 2% growth rate in the PCE total as a sign of price stability. That won’t happen anytime soon. In fact, the Fed’s latest forecasts suggest that the central bank expects the PCE to rise 5.4% this year, versus 5.2% forecast in June.

“I don’t see anything short-term to give the Fed tons of comfort that inflation is headed for 2%,” said David Petrosinelli, senior trader at InspireX. “Wages will remain high and that will keep the Fed in suspense.”

But there is another concern. While wages continue to rise, they are not keeping pace with the increase in consumer prices. You don’t have to be a math genius to realize that 5.2% is less than 6.2%.

“Wages are a real pain point. People pay more but don’t make more,” said Marta Norton, chief investment officer of the Americas at Morningstar Investment Management. With that in mind, Norton said there was a “higher likelihood of stagflation.”

Stagflation is the uncomfortable economic combination of stagnant growth and persistent inflation.

Retail sales have held up relatively well despite inflationary pressures, but Norton warns this may not last forever. American buyers would eventually hit their breaking point and just start buying the bare essentials. A slowdown in consumption will inevitably lead to lower prices… but also to slower economic growth.

“Inflation is its own remedy. Consumers have the power to spend or not to spend,” she said.

The third quarter is mercifully over. It was another sucker for the market. September was especially gloomy. It was the worst month for the Dow since the pandemic began in March 2020.

But while we seem to be in a bear market for everything as bonds, gold and bitcoin have all fallen this year, there are some hopeful signs for the coming months.

The fourth quarter is usually a festive time on Wall Street. Investors tend to buy stocks in anticipation of robust consumer spending over the holiday season. Businesses also typically spend more to flush out those annual budgets. And even large companies often give rosy prospects for profit expectations for the coming year in October.

“October was a turnaround month — a ‘bear killer’ if you will,” Jeff Hirsch, editor-in-chief of Stock Trader’s Almanac, said in a recent blog post.

Hirsch added that a dozen bear markets since World War II had ended in October. And out of those twelve years, seven market bottoms occurred during the mid-election years.

Traders will definitely be watching Washington closely this fall to see if Republicans gain control of the House of Representatives. That could lead to another deadlock in DC, which investors tend to like.

Whether or not US companies and investors will be as optimistic this October is up for debate amid concerns about inflation, interest rates and the global economy. Finally, October is also famous for big crashes, most recently in 2008 but also in 1987 and of course 1929.

So stocks could definitely take another turn for the worse. However, experts are confident that the end of the bear market is in sight.

“We’re nearing a bottom,” said Christopher Wolfe, chief investment officer of First Republic Private Wealth Management. “Many quality companies are for sale. It is time to be patient and reposition.”

Monday: US ISM Manufacturing; Chinese stock markets have been closed all week

Tuesday: US Job Vacancy and Labor Turnover (JOLTS); Japanese inflation; Interest rate decision in Australia

Wednesday: US ADP private sector jobs; US ISM Services; OPEC+ meeting

Thursday: Weekly Unemployment Claims in US; Earnings from ConAgra (CAG), Constellation Brands (STZ), McCormick (MKC) and Levi Strauss (LEVI)

Friday: US jobs report; Germany industrial production; Tilray (TLRY) Earnings

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