Photograph Source: Pete unseth – CC BY-SA 4.0

The question for the Fed is whether it has to worry more about inflation or a weak labor market. Last week’s data indicate both are real concerns, but to my mind, the labor market weakness is unambiguously the bigger problem. I acknowledge that I am generally far more concerned about workers being unemployed than modest inflation rates that may be somewhat higher than we want, but the specific circumstances do warrant much more concern about the former than the latter.

The big news item on the labor market side last week was the jump in new unemployment insurance claims, which rose by 27,000 to 263,000, the highest since October of 2021. To be clear, the weekly data are erratic, and this could be reversed due to revisions or shown to be an aberration with this week’s data. Also, even 263,000 is not high by historical standards, so by itself this would not be a big deal.

However, this fits with a series of other reports showing a weakening of the labor market. The most important is the August jobs report, which showed both weak job growth for the month, and that we have not had any job growth outside of the healthcare sector for the last four months.

The jobs report also showed a modest rise in the unemployment rate to 4.3 percent in August. With the sharp drop in immigration reducing the size of the potential labor force, going forward we should be paying more attention to the unemployment and employment percentages in the household survey than the job creation number in establishment survey.

In addition to the rise in the overall unemployment rate, we have seen sharp rises in unemployment among Black workers and young people (ages 20-24), who tend to be hit hardest in a weak labor market. The unemployment rate for Black workers hit 7.5 percent in August, up from an all-time low of 4.8 percent hit in April of 2023. The unemployment rate for young workers reached 9.2 percent in August, the highest since May of 2021.

The share of unemployment due to voluntary quits stood at 10.7 percent, compared to an average of 13.2% in 2018-19 when the unemployment rate was comparable. This is consistent with the data from the Job Openings and Labor Turnover Survey (JOLTS), which showed both a low quit rate and the number of unemployed workers exceeding the number of openings for the first time since the early days of the recovery.

Finally, we also saw a slowing of wage growth in the August jobs report. The average hourly wage has increased at just a 3.5 percent annualized rate, taking the average of the last three months (June, July, August) compared with the prior three months (March, April, May). By the same measure, the annual rate of wage growth for non-supervisory restaurant workers has been just 3.2 percent. The pay for this group is especially sensitive to labor market conditions.

This brings up the second part of the Fed’s mandate. There is no doubt that inflation is rising, driven by Trump’s tariffs and labor shortages in certain sectors, notably agriculture, as a result of mass deportations. There will be further increases in the months ahead as more tariffs get put in place and companies pass on a larger portion of the tariffs to consumers.

But the question Powell is asking, as he said in his Jackson Hole speech last month, is whether this is likely to be a one-time increase in the price level or is going to lead to more rapid wage growth, and then result in further prices hikes next year. The weakness we are now seeing in the labor market indicates this this sort of wage-price spiral is unlikely. Workers simply don’t have the bargaining power to substantially increase the pace of wage growth.

That is good news from the standpoint of inflation. It means that the higher inflation we are now seeing is not likely to continue, assuming that Trump stops increasing his tariffs. The wave of inflation will gradually recede, and we should fall back to the pre-Trump inflation path, with the rate moving back towards the Fed’s 2.0 percent target.

While that may be good news on the inflation front, it is bad news on the wage front. This is a story where workers are being forced to eat the Trump tariffs in the form of lower real wages.

The trillions of dollars in tariff revenue that Trump constantly boasts about, is money out of the pockets of ordinary workers. He has given huge tax cuts to Elon Musk and his other incredibly rich friends which he is offsetting by taxing ordinary workers, in addition to his cuts to their healthcare. The Fed may not have to worry about inflation, but tens of millions of working families will have to worry about how to make ends meet. I guess that’s MAGA.

This first appeared on Dean Baker’s Beat the Press blog.

The post Cheap Advice for the Fed appeared first on CounterPunch.org.

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