There are three signs from today’s jobs report that inflation will remain high
Friday’s jobs report showed that the booming US economy is creating hundreds of thousands of jobs, indicating that rising prices are here to stay despite the Federal Reserve’s efforts to contain it.
The United States added 263,000 jobs in November, according to the federal jobs report released on Friday, far more than the 200,000 job gain economists had expected. The unemployment rate also stabilized at 3.7 percent, just 0.2 percentage points higher than its level in February 2020.
This isn’t bad news if you’re looking to get a different or new job, but it’s bad news for policymakers worried about inflation — a huge political issue for both parties.
It comes days after Federal Reserve Chairman Jerome Powell indicated that the central bank wanted to cut interest rate hikes, raising red flags on whether that would change. Stocks initially fell on the news before rallying before the close. The S&P 500 finished down just a tenth of a point for the day.
Here are three data points from the report that suggest inflation is not abating and will complicate the Fed’s interest rate plans.
The new report showed rapid job gains
The US has added an average of 392,000 jobs per month since the start of the year. While this is slower than the average monthly earnings of 562,000 in 2021, job growth is still much faster than the average monthly gains of 178,000 in 2019.
A strong job market does not necessarily push inflation higher on its own, and it is possible that the US will continue to see strong job opportunities without high inflation. Inflation remained below the Fed’s 2 percent target even as the US unemployment rate fell to 3.5 percent in 2019.
But many of the forces underpinning rapid job gains, including resilient consumer spending, may also push consumer prices higher.
“The job market looks very much like it’s normalizing from the pandemic and reopening shocks, not necessarily in a recessionary way,” Preston Moye, an economist with the nonprofit research firm America, said in an analysis Friday.
“However, the full effects of the Fed’s rate hike have yet to be seen, and we should be on the lookout for signs of further deterioration in the coming months.”
The report found that wages are rising faster
The main way the Fed fights inflation is by raising interest rates in a way that increases costs to households, leaving them with less money to spend on goods and services. This will be more difficult if Americans’ salaries continue to grow at a rapid pace.
Average hourly earnings rose 0.6 percent in November – much faster than the 0.3 percent wage growth economists forecast last month – for an annual gain of 5.1 percent. The Labor Department also revised wage growth in September and October higher, after initial reports showed wage growth eased toward a more sustainable pace.
“The biggest news in this release are the large upward revisions in wage growth for September and October and a large number for November,” Jason Furman, who chaired the White House Council of Economic Advisers (CEA) under former President Obama, said on Twitter.
This is the second time we have this year [revisions] Such dashing hopes that maybe symbolic [wage] Growth was cooling.”
It may seem strange to want people to make less money if they are having trouble keeping up with rising prices. But Federal Reserve Chairman Jerome Powell stressed on Wednesday that it will be impossible for companies to stop raising prices at rapid rates until wage costs and hiring workers have stabilized.
That’s why, Powell said, the Fed will continue to try to reduce the number of open jobs and employers’ need for new workers — two major forces behind rapid wage growth. Without many jobs to choose from, workers will eventually need to settle for lower wages than they would have been able to secure in a hotter economy.
“To be clear, strong wage growth is a good thing,” Powell said in remarks at the Brookings Institution.
“But for wage growth to be sustainable, it has to be consistent with an inflation rate of 2 percent,” he continued, referring to the Fed’s annual inflation target.
The report shows that the overall workforce remains stagnant
The US labor force is still about 3.5 million fewer than it was before the pandemic and has shown little progress toward closing that gap.
Both the labor force participation rate and the employment-to-population ratio have budged little since the start of the year, even as a historically strong labor market and rapid wage growth have propelled millions of Americans to better jobs.
Economists are still not sure why more workers haven’t returned to the workforce, though they generally blame a combination of early retirements during the pandemic, lingering effects from COVID-19 infection and a sharp drop in immigration.
“Given the increase in wages, one would think that workers would be drawn into the labor market. This is not happening in the current economic expansion,” Joe Brosolas, chief economist at audit and tax firm RSM, explained in an analysis.
“Long-term demographic trends of an aging workforce and declining immigration, along with the impact of the pandemic, are causing an acceleration of structural change in the workforce.”
These changes have left companies struggling to fill job vacancies, increasing wages to remain adequately staffed, and raising prices to compensate.
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