Three signs from today’s jobs report that indicate that inflation will remain high
Friday’s jobs report showed the bustling U.S. economy adding hundreds of thousands of jobs, suggesting rising prices are here to stay despite efforts by the Federal Reserve to curb them.
The United States added 263,000 jobs in November, according to the federal jobs report released Friday, far more than the 200,000 jobs economists had expected to see. Unemployment also remained at 3.7 percent, just 0.2 percentage points above the level in February 2020.
This isn’t bad news if you’re looking to get a second or new job, but it’s bad news for politicians worried about inflation — a big political issue for both parties.
It comes days after Fed chief Jerome Powell signaled that the central bank wants to reduce its rate hikes, raising red flags about whether that will change. Shares initially fell on the news before rising before the close. The S&P 500 ended down just a tenth of a point for the day.
Here are three data points in the report that suggest inflation is not cooling and will complicate the Fed̵[ads1]7;s plans for interest rates.
The new report showed rapid job gains
The US had added an average of 392,000 jobs per month since the beginning of the year. Although slower than the average increase of 562,000 per month in 2021, job growth is still far faster than the average monthly increase of 178,000 in 2019.
A strong labor market does not necessarily push inflation higher on its own, and it is possible for the US to continue to see strong job creation without high inflation. Inflation remained below the Fed’s target of 2 percent even as the U.S. saw the unemployment rate fall to 3.5 percent in 2019.
But many of the forces driving rapid job growth, including robust consumer spending, can also push consumer prices higher.
“The labor market looks a lot like it’s normalizing from the pandemic and reopening shocks, and not necessarily in a recession-leading way,” Preston Mui, an economist at the research non-profit Employ America, said in a Friday analysis.
“However, we have yet to see the full effects of the Federal Reserve’s interest rate hikes, and we should be on the lookout for signs of further deterioration in the coming months.”
The report shows that wages are increasing faster
The main way the Fed fights inflation is by raising interest rates in a way that raises costs for households, leaving them with less money to spend on goods and services. It is more difficult if US paychecks continue to grow at a rapid pace.
Average hourly wages rose 0.6 percent in November — much faster than the 0.3 percent wage growth expected by economists last month — for an annual gain of 5.1 percent. The Ministry of Labor also revised wage growth in September and October higher, after the first reports showed that wage growth fell towards a more sustainable pace.
“The biggest news in this release is big upward revisions in wage growth for September and October and a big 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 this year we have seen [revisions] as this dashes the hopes as perhaps nominal [wage] growth was chilling, he continued.
It may seem strange to want people to make less money if they have trouble keeping up with rising prices. But Fed Chairman Jerome Powell argued on Wednesday that it will be impossible for businesses to stop raising prices at rapid rates until the costs of paying and recruiting workers stabilize.
For that reason, Powell said, the Fed will continue to try to reduce the number of job openings and employers’ need for new workers — two key forces behind rapid wage growth. Without many jobs to choose from, workers will eventually have to settle for lower wages than they might have been able to secure in a warmer economy.
“To be clear, strong wage growth is a good thing,” Powell said in comments at The Brookings Institution.
“But for wage growth to be sustainable, it has to be consistent with 2 percent inflation,” he continued, referring to the Fed’s annual inflation target.
The report shows that the total workforce remains stagnant
The U.S. labor force is still down about 3.5 million workers from its pre-pandemic size and has shown little progress toward filling that gap.
Labor force participation and the employment-to-population ratio have each edged up slightly since the start of the year, even as a historically strong labor market and rapid wage growth drove millions of Americans into better jobs.
Economists are not yet sure why more workers have not re-entered the workforce, though they generally blame a combination of early retirements during the pandemic, lingering effects from COVID-19 infections and a sharp decline in immigration.
– Given the wage increase, one would think that employees would be drawn into the labor market. But that is not happening in the current economic expansion,” Joe Brusuelas, chief economist at audit and tax firm RSM, explained in an analysis.
“The combined long-term demographic trends of an aging workforce and lower immigration, along with the impact of the pandemic, are causing an acceleration of structural changes in the workforce.”
These changes have left companies struggling to fill open jobs, raising wages to stay adequately staffed and raising prices to compensate.
