The Week in Review: February 7, 2022
Rising Employment, Rising Wages, Rising Inflation
The Omicron virus is probably putting a dent in economic growth right now. But the latest numbers from the U.S. Bureau of Labor Statistics (BLS) suggest any damper may be temporary.
On Friday, the U.S. BLS reported nonfarm payrolls jumped 467,000 in January, which comes on top of 510,000 and 647,000 in December and November, respectively.
While a few of the internals took some of the shine off the report, solid economic growth is creating gains in employment. And job openings are near a record high, which is supporting wages. Note the higher peaks and higher valleys in Figure 1.
It’s a huge benefit to workers in some industries, but higher wages can force businesses to pass along higher costs.
Figure 2 compares the one-year change in average hourly earnings (left side) to the one-year change in the core Consumer Price Index (right side). The core excludes food and energy. Mostly, wages and the core CPI tend to track each other. A notable exception was the early days of the pandemic, when job losses were concentrated in low-wage jobs, which temporarily lifted the average.
The distortions have mostly worked their way through the system. We’re now seeing sizable increases in average hourly earnings. It is contributing to higher inflation (the rising core CPI), as businesses boost prices to offset higher costs.
Looking ahead, the Fed has signaled its determination to bring inflation under control. That means investors are slowly getting used to the possibility that the Fed could hike rates at each of the seven remaining meetings this year. We see it in rising Treasury yields.
Today, the unemployment rate is low, and inflation is high.
By hiking rates, the Fed hopes to slow overall demand for goods and services, which would probably reduce job opportunities and restrain wage growth. It’s not a pleasant prospect for workers, but neither is high inflation.
Could today’s high-inflationary environment push the Fed to make a statement in March—a 50 basis point (1 bp = 0.01%) increase in the fed funds rate?
There hasn’t been a truly aggressive rate-hike cycle by the Fed since 1994, when the Fed implemented several 50 bp increases and one 75 bp hike, per data from the St. Louis Federal Reserve. In one year, the fed funds rate rose from 3% to 6%. It’s near zero today.
One measure by the CME Group puts odds of a 50 bp increase at 35% in March, with a 65% chance of a 25-basis-point hike (as of February 4).
If you have any questions or concerns, please don’t hesitate to let me know.
Two for the Road
Since 1946, there have been 84 declines of 5% to 10% in the S&P 500, which works out to more than one a year. The average time it takes to recover from those losses is one month. —CNBC, January 25, 2022
Since the spring of 2021, roughly 33 million Americans have quit their jobs. In November alone, a record-breaking 1 million leisure and hospitality workers quit. —NPR, January 25, 2022
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