Prices and Jobs
It has been some time since we have written about recent employment and inflation trends. Both are important parts of the economy and are also the main considerations that impact administered interest rate policy and open market operations applied by the US Federal Open Market Committee (“FOMC”). The FOMC has the dual mandate of providing full employment and stable prices. Inflation and employment issues have been major topics in the financial press and are clearly observable in our daily lives. The FOMC uses the Personal Consumption Expenditure Index (PCE) as its preferred measure of inflation, and global inflation data released this week has caused some fixed income and equity volatility.
- The PCE is a broad measure of prices of goods and services purchased by all households across the United States. Because of its depth and more regular composition updates, the PCE tends to be less influenced by major price movements in certain products like gasoline. Thus, the index smooths major swings and is a good measure of current inflation.
- Figure 1 presents the data over the past 20 years. As you can see, prices are now the highest in the last 2 decades. The last period of elevated inflation was in the early 2000’s during the commodity boom in the run up to the Great Financial Crisis. By comparison, prices are significantly higher now but materially lower than the 1970’s through early 1990’s when PCE inflation ranged from 4% to 10%.
Employment is also significantly in influx. As you can see from Figure 2, actual Unemployment is low (blue line) but not as low as it was before the pandemic. The Participation Rate (green line) shows that since the pandemic, 2% of Americans have left the job market. Indeed, with many stories of both elevated resignations and employee shortages, depending on the industry, the current employment situation is complex. Most investors suspect that this will also lead to further inflation given recent wage growth trends as well.
“This means that” the global economy continues to recover. The trends in inflation and employment are still fluctuating along with major forces that have resulted from reaction to the pandemic. It will take some time for this to work itself out.
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