Is The Job Market a Contributing Factor to The Inflation in The US?

Is The Job Market a Contributing Factor to The Inflation in The US by bloombergsubscriptioncom

At the Federal Reserve, they are beginning to worry about rising wages and how this can lead to high inflation in the economy. So officials wonder how much risk there is of this actually happening.

The Government should continue to maintain rates high to combat inflation reports James Travis of Bloombergsubscription.com. The Fed’s preferred measure of inflation shows consumer prices were 6.2% higher than a year earlier as of September. But it is not so bad compared to the 7% registered in July. Even so, it has not diminished as fast as expected.

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On the other hand, the central bank has already raised rates considerably in a short period: on Wednesday, the midpoint of its target range will probably be 3.875%, compared to 0.125% in March. Considering the full force of rate hikes working on the economy with a lag, as well as a backlog of anecdotal reports that some prices are cooling, the Fed might want to slow the pace of its rate hikes. Fed Chairman Jerome Powell could signal that the question of whether the central bank should raise rates another three-quarter of a point at its December meeting, or half a point less, is up for debate.

The debate over how far interest rates should be raised depends on the degree to which the labor market is fueling inflation. There’s no question the job market is tight: Economists surveyed by The Wall Street Journal believe Friday’s jobs report will show the jobless rate was 3.6% in October, slightly above the 3.5% in September, but still extremely low. Additionally, they think average hourly earnings will rise 0.3% in October from September, implying a 4.7% gain from a year earlier.

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In January 2020, the unemployment rate was 3.5% before the economy suffered the pandemic changes. Back then, hourly earnings increased by as much as 3% a year, and inflation was running below the 2% target the Fed was targeting. So something has changed.

One of the labor market differences could be that although unemployment rates are similar, the labor market is much tighter now. The number of vacancies has started to decrease slightly, but it is still much higher than before the pandemic. The share of workers quitting, which some people see as a better measure of the tightness of the labor market, is also higher than before the pandemic but has been falling since late last year, an indication economist Justin Bloesch argues. In a recent Roosevelt report. Institute publication that the current low unemployment rate is not inherently more inflationary than before the pandemic.

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On the other hand, a recent analysis by Evercore ISI suggests that rising wages are more of a delayed response to rising inflation than an inflationary response itself. Wages are not rising because people are trying to get ahead of future inflation as much as they are trying to catch up with costs that have already increased. Some supporting evidence for that: On Friday, the Labor Department reported that its employment cost index, a measure of workers’ wages and benefits, rose 5% in the third quarter from a year earlier. That’s a big jump, but still less than inflation.

The problem with this for the Fed is that it’s easier to sit back and argue that the labor market might not be generating as much inflation when there isn’t much inflation. It could well be that the rise in prices has more to do with factors like pandemic-related distortions and Russia’s invasion of Ukraine than anything else, but proof of that won’t come until inflation cools. The best outcome would be for it to emerge before the Fed breaks the labor market.

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