The pandemic disrupted the typical economic patterns, so interpreting data at this stage is exceptionally confusing. Here are a few observations to help one sort through the mixed signals.
Headline year-over-year inflation makes the news, but one needs to carefully monitor month-over-month data, as year-over-year data is influenced as much by what happened one year ago as it is by what is happening today. For inflation to recede to 3%, it means the month-over-month change in CPI needs to slow to an average of 0.25% per month.
During the height of the pandemic, consumers bought more goods than before because access to certain services was constrained, which exacerbated the problem with supply chains. A return to pre-pandemic patterns is happening quite slowly, and goods inflation is still outpacing service inflation.
But not all challenges are due to the pandemic. As the service industry restaffs, especially in the hospitality and travel sectors, a considerable number of entry-level jobs are going vacant. Since it is younger workers that typically take these entry level jobs, it is important to note that the younger cohort of the labor force is actually shrinking – adding to entry-level hourly wage pressures.
Finally, note that the Federal Reserve’s dual mandate is about encouraging full employment and price stability. This means that jobs matter more than GDP. Real GDP matched its pre-pandemic high back in Q2 2021 and has since decelerated sharply in 2022.
Jobs are just now getting close to their pre-pandemic high. And even if month-over-month job growth slows in the second half of 2022 back to trend, what will matter to many analysts is whether or not the unemployment rate remains below 4%.
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