At Last, a Piece of Encouraging News on Inflation

After a week of big ups and downs in the stock market, investors, on Friday, largely shrugged off a new Labor Department employment report for April, and the Dow and Nasdaq both closed slightly down. Such a reaction was surprising, because the report contained some positive news on inflation, which has been the primary thing spooking investors recently. Wage increases, which play a big role in determining the inflation rate over the longer term, moderated last month. “The three-month annualized rate of increase of [average hourly earnings] now stands at just 3.7%, the lowest since March 2021, and down sharply from 6.3% as recently as November last year, ”Ian Shepherdson, the chief economist at Pantheon Macroeconomics, wrote in a report to clients.

In the short term, this drop in wage growth isn’t great for workers, many of whom have seen their earnings fail to keep up with rising prices since last year. But, if the moderation in wage inflation persists, it would calm fears surrounding an emergence of a nineteen-seventies-style wage-price spiral, which Republicans have been playing up and some investors have been panicking about. It would also increase the chances that the Federal Reserve — which raised interest rates earlier this week by half a percentage point — would reduce inflation without creating a recession that workers would bear the brunt of.

One prominent economist who has been raising the alarm about surging prices said the new wage figures had prompted him to shift slightly closer to the view that rising inflation is a transitory phenomenon. “I rarely change my views on the economy very much on the basis of a single data release but this one has moved me more than any single data point generally does,” Jason Furman, a Harvard economist who headed the White House Council of Economic Advisers during the Obama Administration, wrote in a group e-mail. In a blog post, Furman and a colleague, Willie Powell, said the new report on wage data “raises the possibility that nominal wage growth in 2021 was boosted by one-time, post-pandemic factors.” They added, “More data will be needed, however, before being at all confident this is the case.”

That’s a fair point. Some economists played down the lower wage-increase figures in the new jobs report, saying that they didn’t necessarily add up to much. “On the surface, wage gains slowed,” Aneta Markowska and Thomas Simons, two economists at the investment bank Jefferies, wrote in a note to clients. “However, the slowdown was driven by odd declines in retail and utility wages. All other sectors saw steady or faster wage inflation, so there is no evidence of a broad-based slowdown. “

The debate about inflation won’t be resolved for some time. Its persistence could ultimately depend on unpredictable factors, such as the outcome of the war in Ukraine and the longevity of the current coronavirus lockdowns in China. But more good news is possible next week, when the Department of Labor releases the Consumer Price Index for April. The rate of inflation — which was eight and a half per cent in March — could well decline a bit. In the past month, energy prices have remained relatively steady. Plus, the cost of used cars, which was a big factor in last year’s initial inflation spike, is now falling. “April will be the first month to see headline inflation fall, to 8.0 or 8.1 per cent,” Shepherdson told me. That outcome wouldn’t represent a huge drop, and eight-per-cent inflation would still be a very high rate by recent standards, but Shepherdson predicts it will continue falling in the summer.

The employment report also contained good news on job growth. Non-farm employers created four hundred and twenty-eight thousand jobs in April, bringing the total number of new jobs created so far this year to more than two million. This should calm fears that the US economy is stumbling. These concerns were accentuated late last month by another report, from the Commerce Department, indicating that gross domestic product, the broadest measure of the economy’s output, shrank slightly in the first three months of 2022. Economies that are in serious trouble, though, don ‘t consistently create large numbers of jobs month after month. As I wrote after the GDP report came out, it was almost certainly an anomaly.

Taken over all, the employment report indicated that the economic recovery from the pandemic remains on track. It also suggested that some of the recent inflationary pressures may be beginning to ease. After all the angst of the past few months, it was encouraging to get some positive news on this front, even if its ultimate significance is still open to debate.

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