W.rant Displaying economic figures to three decimal places is usually an exercise in incorrect precision. But after two years of uncomfortably high inflation, price statistics have come under scrutiny. The unrounded month-over-month increase in U.S. core inflation (net of volatile food and energy costs) was 0.158% in June, even more welcome to officials than the rounded 0.2% increase. , which was itself the lowest pace in more than two years. Having more decimal places does not change the problem. Is America’s inflationary fever finally over?
The latest numbers bring a lot of good news. Headlines focused on a slowdown in the overall consumer price index. The year-on-year rate of increase in June was just 3%, a significant slowdown from the 9% pace in June 2022, mainly due to lower energy prices. But various indicators of underlying inflation also looked attractive. Most notably, prices for core services, excluding housing—a category often cited by Federal Reserve Chairman Jerome Powell as an indicator of underlying inflationary momentum—were lower in June than in May. is a slight drop in
Such a benign inflation report by itself might be expected to encourage the central bank to keep rates on hold at its next meeting (end of July). However, it’s never wise to read too much into one month’s worth of data. Fed policymakers have many other factors to consider in their decisions, including the labor market. And various indicators highlight its amazing resilience.
There are 1.6 jobs for every unemployed person in the US, a rate that has fallen slightly since mid-2022 but is well above pre-pandemic standards. Since February 2020, the economy has added nearly 4 million jobs, with employment above the long-term trendline. About 84% of prime workers are currently working or looking for work, the highest number since 2002 and just one percentage point below the all-time high.
From the workers’ point of view, such vibrancy should be welcomed. Wages are growing fast in service sectors such as construction, which require less education. This in turn contributed to reducing income inequality. The less affluent are benefiting from tighter labor markets. The unemployment rate for black Americans hit a record low of 4.7% in April.
But will this tight labor market translate into broader price increases? Hourly wages, for example, rose at an annual pace of 4.4% in June, consistent with inflation well above the Federal Reserve’s 2% target. Alternative measures suggest the uptrend could become even steeper. Wages have risen about 6% annually this year, according to a follow-up survey by the Fed’s Atlanta branch.
As a result, despite the recent slowdown in inflation, the Fed is almost certain to resume rate hikes after last month’s moratorium due to strong employment conditions. The market currently puts a 92% chance of a 15-minute rate hike in July. A month ago it looked more or less like a coin toss.
What the Fed will do next is less certain. Before June’s inflation data, Mr. Powell and many of his colleagues had suggested that the central bank would raise rates further by the end of the year. This is now questionable. If inflation eases again in July and August, central banks will come under extreme pressure to end the tightening cycle. It doesn’t stop at 3 decimal places. But three consecutive reports of modest inflation should work. ■
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https://www.economist.com/finance-and-economics/2023/07/13/is-americas-inflationary-fever-breaking Is America’s Inflation Fever Aligning?