America’s inflation turnaround

It may be time to update your inflation narrative.

The ultra-hot readings that defined the first half of 2022 appear to be firmly in the rearview mirror, improving the odds that price pressures can dissipate further without excessive economic pain.

  • That’s the key takeaway from the December Consumer Price Index released this morning, which confirmed notably cooler inflation as the year came to a close.

Why it matters: 

The nation’s inflation problem isn’t over, but so far inflation is slowing while the job market is still healthy, an enviable combination.

  • As Princeton economist Alan Blinder put it in an op-ed last week, inflation was “vastly lower” in the second half of 2022 than the first; yet, “hardly anyone seems to have noticed.”

By the numbers: 

In the final three months of 2022, core inflation (which excludes food and fuel costs) came in at an annualized 3.1% — higher than the Fed aims for, but hardly crisis levels. In the second quarter of the year, that number was 7.9%.

  • It’s a stunning decline, occurring alongside a labor market that by nearly all measures is still flourishing. Just this morning, the Labor Department announced that jobless claims fell to an ultra-low 205,000 last week.

State of play: 

Grocery prices rose 1.1% in the final three months of the year, an uncomfortably high rate, but not as extreme as the rates seen earlier in 2022.

  • Gasoline prices, pushed up by Russia’s invasion of Ukraine, were once the crucial reason why inflation was rising. In recent months, the opposite has been true: December pump prices slid 9.4%, helping drag the overall index into negative territory.
  • Disinflation was at work for many other goods, including used cars (-2.5%) and new vehicles (-0.1%) where prices have reversed, helped by easing supply chain bottlenecks.
  • Shelter costs pushed inflation upward, surging 0.8% in December. But private-sector data points to rents on new leases falling in recent months, which would only filter into the CPI data over time. That makes for a more benign inflation outlook in 2023.

What to watch: 

That’s not to say there aren’t risks ahead. The war in Ukraine is ongoing, and another energy price shock could occur.

  • The Fed has also focused in on the services sector, where price increases have slowed from last summer but remain frothy. The risk is that business costs associated with the still-tight labor market (like higher wages) will pass through to prices for consumers.

The bottom line: 

Inflation will still be a worry in 2023, but much less so than it seemed a few months ago.

Health systems’ minimum wage skyrockets

The percentage of healthcare organizations with an internal minimum wage of $15 or higher increased significantly over the last year, according to the “2022 Health Care Staff Compensation Survey” from SullivanCotter.

In 2021, less than 30 percent of healthcare organizations had an internal minimum wage of $15 per hour or more; this year, nearly 70 percent do. Some health systems are increasing the internal minimum wage to stay competitive amid staffing shortages and rising inflation. Others are increasing hourly rates as a result of union negotiations.

Health systems reported large increases in overall staff salaries, wages and benefits this year, and many expect to see increases in 2023 as well.

Here is how the internal minimum wage rates changed over the last year:

1. Less than $10 per hour
2021: 2.9 percent
2022: 2.2 percent

2. $10 per hour
2021: 14.7 percent
2022: 5 percent

3. $11 per hour
2021: 13.7 percent
2022: 3.9 percent

4. $12 per hour
2021: 12.7 percent
2022: 7.8 percent

5. $13 per hour
2021: 12.7 percent
2022: 6.1 percent

6. $14 per hour
2021: 14.7 percent
2022: 5.6 percent

7. $15 per hour
2021: 26.5 percent
2022: 53.9 percent

8. More than $15 per hour
2021: 2 percent
2022: 15.6 percent

Wage growth looks healthy but not inflationary

The Goldilocks nature of these jobs numbers is particularly apparent in the wage data.

By the numbers: Average hourly earnings rose by 0.3% in December, and are up 4.6% over the last year. Over the last three months, worker pay rose at a 4.1% annual rate.

  • Wages are rising, but unlike a year ago, the pace is consistent with the economy settling into the 2% inflation that the Fed seeks.
  • For example, there were stretches in 2018 and 2019 that featured wage growth similar to that in Q4 paired with low inflation levels — which meant rising real wages for workers.
  • In other words, current pay growth, if sustained, would help diminish the Fed’s fears of an upward spiral of wages and prices. Also, it sets workers up to see gains in their real compensation, if and when inflation comes down.

The intrigue: It appears that a surge in earnings initially reported in November was a head fake. The Labor Department revised those numbers to show a 0.4% rise in hourly earnings, not the 0.6% first reported.

  • The original figures had been a source of alarm among Fed watchers, suggesting the central bank might need to step up its monetary tightening campaign.

It is a good reminder  for both policymakers and those of us in the media — to not overreact to single-month shifts in any volatile data series.

A superb jobs report

We really liked what we saw in the December jobs report, which made us more optimistic about the possibility the 2023 economy will hold up reasonably well. More details below.

  • Situational awareness: In less optimistic news, the Institute for Supply Management’s survey of service industry activity plunged in December, to 49.6% — down from 56.5% in November. This is the first time the index has been in negative territory since May 2020.

The U.S. labor market is extraordinarily strong, despite gloom-and-doom economic forecasts and high-profile layoffs.

  • That is the takeaway from December numbers, out this morning, that were outstanding in subtle and not-so-subtle ways.

Why it matters: If America’s economy is going to come in for a soft-landing — inflation dissipating without mass unemployment — you would expect to see numbers that look a lot like last month’s.

  • The economy continues to add a healthy number of new jobs, though the pace is moderating. Wages are rising, but not so quickly as to alarm economic policymakers. And more workers are entering the labor force, which — if sustained — could heal labor shortages.
  • The data has positive developments both for American workers — who continue to have abundant job opportunities — and for Fed officials seeking evidence that their inflation-fighting efforts are starting to cool job creation and wage growth to more sustainable rates.

The headline unemployment rate, at 3.5%, matched its lowest levels in decades. If you extend the calculation out a couple more decimal places, University of Michigan economist Justin Wolfers points out, it was 3.468%, the lowest since 1969!

  • It fell even as the labor force expanded by 439,000 workers, a welcome development on the supply front after months of little progress. More Americans working means fewer of the labor shortages that have contributed to inflation.
  • An additional 717,000 Americans reported being employed, helping resolve what had been a puzzling disconnect between different sources of labor market data — and in a positive direction.
  • A stunningly low jobless rate might raise some alarm bells at the Fed over the possibility the job market is too tight, and that this could fuel inflation. But the labor force growth and benign wage data (more on that below) may take the edge off those fears.

By the numbers: Employers are still hiring at a rapid pace — 223,000 in December — but slowing from early last year’s unsustainable numbers.

  • The economy has added roughly 247,000 jobs per month on average in the last three months, slower than the 366,000 in the prior three-month stretch, and less than half of the 539,000 jobs added each month in Q1 2022.
  • Evidence of tech layoffs did show up somewhat in the report, with the information sector shedding 5,000 jobs. Temporary help services employment fell by 35,000, the clearest sign employers are paring back demand for workers.
  • But most other sectors, including leisure and hospitality, construction and health care, continued to add jobs.

The bottom line: If we keep getting numbers like these, 2023 may not be such a rough year for workers after all.

U.S. economy adds 263,000 jobs in November

The jobs market stayed strong last month: Employers added 263,000 jobs, while the unemployment rate held at 3.7%, near the lowest level in a half-century, the Labor Department said on Friday.

Why it matters: The figures are the latest signal of a roaring labor market that continues to defy fears of a recession.

  • November’s payroll gains are above the addition of 200,000 jobs that economists had expected.

By the numbers: Job growth last month was slightly slower than the 284,000, added in October, which was revised up by 23,000. In September, the economy added 269,000 jobs, 46,000 fewer than initially estimated.

  • Average hourly earnings, a measure of wage growth, rose by 0.6% in November — faster than the prior month, when earnings rose by 0.5%. Over the past year ending in November, average hourly earnings increased by 5.1%.
  • The share of people working or looking for work, known as the labor force participation rate, ticked down to 62.1%, compared to 62.2% in October.

The backdrop: Economists have been bracing for cracks in the labor market that have yet to appear.

  • It has been an ugly stretch for layoffs in a handful of sectors like technology, with large-scale job cuts announced at MetaAmazon and Twitter.

But overall, the booming job market has continued for workers, even in the face of ultra-aggressive efforts by the Federal Reserve to try to cool demand for labor to help put a lid on inflation.

  • Last month, Fed chair Jerome Powell said that employers bidding up wages to attract workers is not “the principal story of why prices are going up.”
  • Still, the labor market may point to clues about how inflation will evolve in certain categories, including industries within the services sector where wages make up the biggest costs for businesses, Powell said on Wednesday.

U.S. economy adds 261,000 jobs in October as labor market stays solid

https://www.axios.com/2022/11/04/october-job-report-2022-release

The labor market remained solid in October: the U.S. economy added 261,000 jobs, while the unemployment rate rose to 3.7% from 3.5%, the government said on Friday.

Why it matters: The last major economic report before the midterm elections shows that while jobs growth has slowed, employers continue to add workers at a robust pace as the labor market defies fears of a recession.

Driving the news: October’s jobs gains were above the 205,000 payrolls economists expected. It’s a slightly slower pace than the 315,000 jobs added in September, which was revised higher by 52,000.

  • Average hourly earnings, a proxy for wage growth, rose by 0.4% in October — a bit faster than the prior month, when wages grew 0.3%.
  • The share of people working or looking for work, known as the labor force participation rate, was 62.2%, a tick below the 62.3% in September.

The backdrop: The Federal Reserve this year has raised interest rates at historically rapid pace in an effort to slow the economy and, in turn, beat back soaring inflation. Many economists warn that the U.S. will soon enter a recession. Still, the labor market has chugged along.

  • Layoffs are being reported in a handful of sectors, including technology. But a range of job market indicators have suggested that, generally, employers are hungry for workers and trying to hold on to staff.

That is worrisome for the Fed, which fears the too-hot labor market will stoke inflation. But, on the flip side, it’s been great for American workers — though the booming job market has been coupled with decades-high inflation that’s eaten away at wage gains.

  • The economy is a top issue for voters in next week’s midterm elections.

Will agency labor needs become permanent? 

https://mailchi.mp/b1e0aa55afe5/the-weekly-gist-october-7-2022?e=d1e747d2d8

“A few months ago, I was confident we would be able to wean our system off travel nurses. But now I’m not so sure,” a chief nursing officer recently shared with us. Like most health systems, they had seen their use of agency nurses decline from peaks during the Delta and Omicron waves of the pandemic, and were encouraged by anecdotes of nurses returning to staff after stints as travelers. But today they remain “persistently stuck with a quarter of the agency nurses we needed at the peak”. 
 
Seeing nurses returning from travel roles makes sense. It’s naturally a time-limited job—eventually the desire to be home wins out over the earning potential on the road. But another nursing leader shared his fear that a stint as a traveler could become an expected part of the arc of a nurse’s career. And from a hospital operations perspective, agency nursing needs are no longer connected to COVID, but are instead driven by general capacity needs in a tight labor market, keeping the operating rooms, emergency department, and ICUs open.

Health systems and physician groups continue to face labor costs that are up to 40 percent higher than 2019. A permanent need for agency nurses will frustrate efforts to rein in labor costs, through both the dollars spent on premium labor, and the resulting need to boost staff nurse salaries when a portion of their colleagues’ pay is anchored at the “traveling rate”.