Write Determining economic figures to the third decimal place is usually an exercise in false precision. But after two years of uncomfortably high inflation, the price statistics are examined in minute detail. The unrounded monthly rise in US core inflation (net of fluctuating food and energy costs) was 0.158% in June and was even more encouraging for officials than the rounded 0.2% rise, which was itself the slowest rise in more than two years. No matter how many decimals there are, the question remains the same. Is America’s Inflation Fever Finally Ebbing?
The latest numbers brought a lot of good news. Headlines focused on the slowdown in the headline consumer price index: in June it rose just 3% yoy, a notable slowdown from the 9% pace seen in June 2022, thanks largely to a fall in energy prices. However, a number of measures of underlying inflation also looked attractive. Notably, prices for core non-housing services – a category that Federal Reserve Chairman Jerome Powell often cites as an indicator of underlying inflation dynamics – edged down slightly in June compared to May.
Such a benign inflation report alone should prompt the central bank to hold interest rates steady at its next meeting in late July. However, it is never a good idea to read too much into a single month’s data. Fed policymakers have much more to consider in their decision-making, starting with the labor market. And a number of indicators underscore its remarkable resilience.
There are 1.6 jobs available for every unemployed person in America, a ratio that has fallen slightly since mid-2022 but is well above the pre-pandemic norm. Since February 2020, the economy has added almost 4 million jobs, putting employment above its long-term trendline. About 84% of the prime-age workforce is now employed or looking for a job, the highest since 2002 and just one percentage point below an all-time high.
From the employees’ point of view, such enthusiasm is welcome. For service-sector occupations that require less education, such as construction, wage growth has been rapid. This, in turn, has helped reduce income inequality. Less wealthy people benefit from a tight labor market. The unemployment rate for black Americans hit 4.7% in April, a record low.
But will this tightening in the labor market translate into broader price increases? For example, hourly wages rose 4.4% on an annualized basis in June, an inflation rate well above the Federal Reserve’s 2% target. Alternative measures suggest that the uptrend could be even steeper. A tracker from the Fed’s Atlanta office points to annual wage growth of around 6% this year.
So, despite the recent slowdown in inflation, the good employment picture is all but a guarantee that the Fed will hike rates again after a brief pause last month. Markets now estimate there is a 92% chance of a quarter-point rate hike in July; A month ago it was more or less considered a coin toss.
What the Fed will do next is less certain. Ahead of the release of June inflation data, Mr Powell and many of his colleagues hinted that the central bank would make another rate hike before the end of this year. This is now doubtful. If inflation falls again in July and August, the central bank will come under extreme pressure to end its tightening cycle. Three decimal places do not stop. But three consecutive reports of weak inflation should do the trick. ■
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