The US job market is hot, but that could be a bad sign for inflation

At a time when researchers are arguing about how to define a recession, things just got even more interesting. According to the Bureau of Labor Statistics (BLS)

Total nonfarm payroll employment rose by 528,000 in July, and the unemployment rate edged down to 3.5 percent. Both total nonfarm employment and the unemployment rate have returned to their February 2020 pre-pandemic levels.

Even with GDP data declining two quarters in a week, this hot job report suggests all is not bad with the economy — at least currently. Certainly, it is possible that employment is simply lagging behind some of these indicators and would need some time to catch up. But that is yet to be seen.

But regardless of the underlying issue, the hot jobs market does not necessarily mean good news, especially when it comes to inflation.

According to BLS data, the rate of wage growth has only grown each month since April. This would likely signal that underlying inflation — which is defined as “the rate of inflation that would be expected to eventually prevail in the absence of economic slack, supply shocks, idiosyncratic relative price changes, or other disturbances” — is only going up not down.

To put it simply, the rising wages will put pressure on prices which will make likely make prices rise and not fall.

The Federal Reserve Bank has been tightening interest rates in an effort to cool off demand, thereby cooling off the economy, which would bring prices down. But rising wage growth is obviously going to make things tricky.

Inflation pressures

Certainly, wage hikes are good for workers. But they also mean that companies have to raise prices for their goods and services which then drives inflation up. This is why in the short term there is a trade-off between inflation and unemployment — also known as the Phillips curve.

The economy is complex, and with complexity comes uncertainty. So it’s hard to say for sure what the next couple of coming months would entail.

But while the economy might not be in a recession yet — depending on what definition you use — that only means that we will have high inflation to worry about possibly for a long time.