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.