The Jobs Report Was Inconclusive, So the Nation’s Eyes Turn to CPI
Last week’s inconclusive jobs data means that this week’s inflation data has the potential to be very consequential.
The Department of Labor reported that the economy added a much higher-than-expected 275,000 jobs in February, according to the establishment survey, but there were large downward revisions to the previous two months. Average hourly wages rose less than forecast, but the work week unexpectedly lengthened.
The household survey showed that the labor force participation rate held steady for the third consecutive month, a stabilization that suggests workers are no longer being drawn into the workforce from the economic sidelines. If this continues to move sideways, continued demand for labor will mean a tightening labor market and likely additional inflationary pressures.
The household survey found that employment fell by 184,000, and the number of unemployed workers rose to 334,000. While some have cited this as a sign that the labor market could be weaker than the establishment survey’s job growth indicates, that’s not necessarily the case. Historically, discrepancies between the household and establishment surveys tend to be resolved by the household results moving toward the establishment results.
Manufacturing payrolls in the establishment survey fell by 4,000, a surprising result given the growth in job vacancies seen in the Job Openings and Labor Turnover Survey (JOLTS) and the S&P Global purchasing managers survey that showed a sharp uptick in the manufacturing workforce. The consensus estimate had been for growth of 10,000 jobs, and S&P Global had reported that “manufacturers registered the quickest rate of job creation since last September.” This discrepancy may be an indicator that the February survey will be revised up.
Service sectors reportedly added 204,000 jobs, including 91,000 in education and healthcare and 58,000 in leisure and hospitality. These are sectors that have lagged behind others in terms of job growth in the post-pandemic period and may be able to keep growing in the months ahead. Tightness in the services sector’s labor market could put additional pressure on services inflation—which Fed officials have indicated they are focused on.
While the report did not have much evidence of overheating, it also suggested that there may not be much softening occurring. That’s consistent with evidence suggesting that downward progress on inflation may have stalled out at an undesirably high rate.
A recent examination of labor market dynamics by economists at the Federal Reserve Bank of New York provides additional evidence for this. The economists use a bespoke measure of wage growth persistence they called Trend Wage Inflation (TWIn for short) that tries to get at what might be thought of as “core” wage inflation. What they found is that while the high wage inflation of the recent past moderated last year, it is no longer coming down and appears to be stuck at a level that is too high to be consistent with the Fed’s two percent inflation target.
“Our main finding is that, after a rapid decline from 7 percent at its peak in late 2021 to around 5 percent in early 2023, TWin has changed little in recent months, indicating that the moderation in nominal wage growth may have stalled,” the economists wrote on the New York Fed’s Liberty Street Economics blog.
What to Expect When You Are Expecting CPI
On Tuesday, the Department of Labor will release its report on the consumer price index (CPI) for February. Last month, core CPI rose 0.4 percent for the month (or 0.392 percent before rounding) and overall CPI was up 0.3 percent (0.305 unrounded). The consensus forecast is for core and headline inflation to trade places, with core rising 0.3 percent and headline rising 0.4 percent. The Cleveland Fed’s inflation now is forecasting 0.43 percent for headline and 0.32 for core, right in line with what economists predict.
If those figures come in as expected, the reaction will probably be very similar to the reaction to the jobs data. Which is to say, it will be a “wait and see what happens next” report. If inflation comes in significantly weaker than expected, especially core inflation, then the market may start moving forward the date of the first Fed cut from the current June forecast to May. Given the resilience of the jobs market, no CPI report, not even outright deflation, will plausibly move the Fed to consider cutting in March.
Given the upside surprise in the February payrolls, there’s a chance that the inflation data comes in above expectations. The reaction to that would likely be to push expectations for a rate cut out until the July meeting. The upside surprise could come from more persistent services inflation. Core services were up 0.7 percent in January and are expected to rise by a more moderate (although still high) 0.5 percent in this report.
The reaction would be even larger if core goods prices rise. These have been falling and are expected to keep declining in February. But the producer price index (PPI) showed a 0.3 percent rise in core goods prices at both the final demand and intermediate demand stages last month, which could foreshadow a return to goods inflation in the CPI. Since most analysts have goods prices continuing to fall or move sideways for at least a few more months, this could hit the market as a shock.
In his Congressional testimony last week, Fed Chair Jerome Powell reiterated the idea that the Fed needs to gain more confidence that inflation is sustainably headed to two percent before it will cut rates. At the very least, this should mean that inflation stops accelerating.
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