As shown below, overall inflation fell from a 9% annual rate in the middle of 2022 to 2.9% in December of 2024.
While that is certainly good news, the Federal Reserve has been unable to reach its target of 2%. The two components of inflation that have proven particularly sticky are the cost of housing which rose 4.6% over the past year and services where prices increased 4.4%. Inflation in services is largely a function of wage increases which rose 4.2% for the year ending in December. We have been watching for some time for a sign of softness in the labor market which could remove some of the upward pressure on wages. Of course, no one wants a slowdown in the economy sufficient to significantly increase the unemployment rate. However, a slight loosening of the labor market would be welcome. While the numbers are not dramatic, we may actually be getting our wish. As indicated below, the unemployment rate ticked up from a low of 3.5% in mid-2023 to the current level of 4.1%. (Still an attractive level by historical standards) The hiring rate represents the number of people hired in a given month as a percentage of the available jobs. It has declined from 4.6% to the current level of 3.3%. Again, these are not monumental changes but they may finally be signaling a coming moderation in wages that would take some of the pressure off of service and overall inflation.
