The trade-off between unemployment and inflation in the US has worsened a lot, next week’s numbers will show.
Friday’s figures will show that, despite strong net job creation in recent months, the unemployment rate is still around 5 per cent – well above its pre-pandemic low of 3.5 per cent. And the ratio of employment to population, at under 59 per cent, will be well below its pre-pandemic rate of 61 per cent. By both measures, the labour market is slack. Despite this, wage growth is likely to be around 4.3 per cent, well above its pre-pandemic rates. And of course, CPI inflation is also much higher, at over five per cent.
This tells us that inflation is not so much the result of excess demand as of mismatches between the pattern of supply and demand: the snapback in economic activity has caused localised shortages of some types of labour and materials. Such mismatches should fade away as market forces operate to increase supply and retrain and relocate workers – which is why the Fed is in no rush to raise interest rates. The question, though, is how many months this will take.
In the eurozone, meanwhile, purchasing managers should confirm flash surveys which showed continued growth is the service sector, but at a slightly slower pace than in recent months. This should be consistent with official figures for the region which should show retail sales rising in August: the trend here is upwards but with lots of month-on-month volatility.
Official figures should also show small rises in industrial production in France, Italy and Germany. These would still leave output in all three countries 5 per cent or more below pre-pandemic levels, and far below their all-time peaks – which were as long ago as 2007 in Italy and France. This reminds us that the region was stagnating before Covid struck, and that the pandemic is by no means the region’s only problem.
In the UK, purchasing managers in construction and services are likely to say that growth is slowing down as input prices rise.
We’ll also get evidence from the Halifax on the state of the housing market. It is likely to report that annual inflation has fallen below 7 per cent, but only because big rises last summer are dropping out of the data. Prices are still rising, supported by a lack of supply and also perhaps by the stickiness of prices: increased demand for spacious homes leads to price rises, while less demand for city centre flats doesn’t lead to similarly sharp price falls.
