The latest report on job data sheds light on the ongoing issue of inflation, indicating that it continues to be a pressing concern. With average hourly earnings seeing a 0.5% increase, surpassing the 0.3% rate aligned with the Fed’s inflation target, signs of inflationary pressures are evident. Over the past year, wage inflation has averaged 4.1%, slightly exceeding the 3.0% to 3.5% range associated with a 2% rise in prices – a troubling trend indicating that the fight against inflation may be losing ground. The last six months have seen wage inflation rise to 4.6%, indicating a worrisome shift in the wrong direction. This surge in nominal wage inflation raises the specter of a potential economic downturn on the horizon.
Evidence pointing towards a cooling job market has emerged:
- Revision of previous job growth data reveals that the job market isn’t as robust as initially reported, with average monthly job growth in 2023 and 2024 seeing downward adjustments. The speed at which jobs are being added poses a dilemma: is it too fast, risking overheating and inflation, or too slow, risking an increase in unemployment? Comparing job growth to labor force expansion is crucial, with the annual adjustment to the household survey proving challenging to interpret historically. Despite this limitation, a simulation reveals that labor force growth in 2024 was higher than officially reported figures suggest, implying a starker reality regarding job market conditions.
Revisions in the jobs data for previous months have further underscored the realities of the job market. While business payroll surveys are typically considered more reliable, revisions showed a decrease in job growth. Conversely, household surveys that calculate the unemployment rate portrayed an increase in job growth. Closing the disparity in reported employment between surveys, these revisions underscore the intricate web of influences shaping the job market.
However, emphasis on employment figures may not offer a complete picture of the economy’s trajectory, especially concerning inflation forecasts. Various factors, such as immigration crackdowns and policy changes, can influence job growth and wage inflation dynamics. While job growth may decelerate due to immigration changes and impending Fed policy adjustments aiming to curb inflation, wage inflation remains the primary indicator for macroeconomic stability.
Navigating the unpredictability of nominal wage growth, which is often resistant to immediate adjustments, poses a challenge for economic policy-makers. Real-time indicators such as job growth serve as crucial measures in gauging economic health and overheating risks. Amidst these uncertainties, proponents of NGDP level targeting argue for a robust monetary policy framework to address inflation concerns effectively.
As the economy emerges from the aftermath of the Covid-19 pandemic, the Fed’s credibility is increasingly at stake as it grapples with inflationary pressures. Urging a reevaluation of inflation targets or a more transparent alignment of objectives, a recalibration may be necessary to ensure economic stability in the face of evolving challenges.
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