To counteract inflation which peaked at an annual rate of 9% in June of 2022, the Fed increased short term interest rates eleven times between March of 2022 and July of 2023. As inflation began to moderate, it made the first of three cuts in September of 2024 leading investors to expect further reductions during the remainder of 2024 and into 2025. I was in the camp that inflation might remain “sticky” which would cause the FED to move cautiously. My concern was that severe labor shortages in the aftermath of the pandemic were pushing wages up at greater than a 4% clip making it extremely difficult for the Fed to reach its 2% inflation target. I have therefore been watching closely for improved balance in the labor market that would lead to moderation in wage growth. Although somewhat spotty, there are now signs that the pressure is easing.
While still modest by historical standards, the unemployment rate crept up from a low of 3.4% in April of 2023 to the current level of 4.1%, and the average duration of unemployment has increased from 19 to 23 weeks. New weekly claims for unemployment insurance have increased from a low of 193,000 early in 2024 to the current level of 242,000. And, the number of unfilled jobs has declined from a peak of 12 million in 2022 to 7.7 million currently. All four of these metrics suggest at least a moderate decrease in the power of workers to demand significant wage increases. Consistent with that expectation, the following graph indicates that wage growth has moderated to a 3.7% annual rate as compared to the peak of 6% in March of 2022.
So, one of the primary drivers of inflation is heading in the right direction but the outlook has been clouded by the President’s tariff policies. The June year-over-year increase in the Consumer Price Index of 2.7% compared to 2.4% for the year ending in May and the monthly increase in June of .3% compared to .1% in the prior month. It is too early to determine whether these increases were just the normal fluctuations in monthly data or early signs of the pass-through effects of tariffs. This uncertainty will lead the FED to monitor data closely during this summer likely remaining hesitant to cut interest rates pending more clarity.