The Labor Department reported that non-farm payrolls rose by 132,000 in June, which was essentially in line with estimates of 130,000. However, the biggest news in the payroll report is that the April and May payrolls were revised higher by a 75,000, which means that the job market is much stronger than previously believed. Although the unemployment rate remains at 4.5%, the job market is so strong that the unemployment rate could fall to 3.9% by election time next year.

Normally a strong job market can result in wage inflation, which has been one of the Federal Reserve’s top concerns. Fortunately, wage growth slowed to 0.3% in June after a revised 0.4% gain in May. Hourly wages are up 3.9% in the past year, down 0.1% from May’s year-over-year gain.

Although 3.9% wage growth is higher than overall inflation and appears inflationary, after factoring in productivity gains, wage inflation is well-behaved. As a result, I still believe that the Fed has room to cut interest rates if core inflation falls in the upcoming months. We have the best of both worlds right now, steady economic growth without new inflationary pressures.