It’s not the supply chain, it’s the labor market
The consumer-price index hitting a forty-year high would seem like a pretty straightforward headline, but of course there’s already tons of debate about which components saw deceleration, which ones are now picking up, whether it would have peaked already absent the Ukraine invasion, and so on.
But the core issue for the real staying power of inflation in the months (and years) to come is not the direction of oil, wheat, nickel, or any other aspect of the supply chain (although that obviously doesn’t help things) or even the housing market. The real issue going forward is the tightness of the labor market.
On that front, the arguably more important data point this week was the typically second-tier “JOLTS” report (Job Openings and Labor Turnover) released yesterday morning. We previously thought the highest number of job openings on record was November’s tally of just under 11.1 million. The revised data revealed that openings actually surged to nearly 11.5 million in December–even as Omicron was rapidly spreading.
And the January figure, also released, showed just a slight easing to 11.3 million. By comparison, the number of openings for January of 2021 was just 7.2 million. So in the space of just twelve months, the number of job openings in this country soared by 57%. Go back in history, to the boom years pre-financial crisis, and openings never even rose above five million–and the population has obviously not doubled since then.
So of all the things that are different right now compared with the last couple economic cycles, this is one of the starkest. The labor market is extremely, unusually tight. The surge in openings compares with just 6.3 million unemployed Americans who are looking for work as of February. And the labor force participation rate is only a point below its pre-Covid levels as of last month, leaving little extra “slack” to fill all of these openings.
Goldman measures the labor market’s tightness by taking the total number of available jobs in the U.S. (jobs plus openings) and comparing that with the total pool of workers in the labor force (both employed and looking for work). Right now, after the JOLTS report, the number of available jobs outnumbers the pool of workers by about 4.5 million, for a gap of 2.9%–the highest in post-World War II history.
Crucially, this helps explain wage inflation–and wage inflation will be the real key driver of the CPI going forward, especially as the pandemic and Ukraine distortions fade. The current jobs-workers gap points to wage growth of 4.5%, per Goldman, and that gap is unlikely to close until sometime next year, which would keep upward pressure on wages beyond that timeframe.
“The failure of standard models to foresee this [labor market] imbalance has been a major contributor to the upside surprise in both wage and price inflation,” the firm wrote last month. “Even more so than the upturn in goods inflation, it is a key reason why most economic forecasters, ourselves included, failed to anticipate the need for Fed officials to hike aggressively in 2022.” (Emphasis mine.)
And it’s why Goldman remains in the seven-hikes camp for this year (one per meeting) even as the Ukrainian invasion has roiled markets. Adding weight to this view, the European Central Bank just this morning came out more hawkish than expected in its latest meeting. Europe’s economy is much more exposed to Russia and Ukraine than ours, but the central bank reacted not by backing off, but rather accelerating its tightening of monetary policy.
Point being, it’s only if Russia’s war on Ukraine dramatically changes the dynamics of the U.S. labor market that the Fed would have any real justification in “going it slow” on tightening policy this year. So far, there’s no sign of that.
In fact, the Wall Street Journal in a front-page article today highlights the British economist Charles Goodhart, who predicted that we would be in this situation not just in the U.S., but globally, in his 2020 book “The Great Demographic Reversal.” (Fertility rates are dropping, China will lose 100 million workers over the next 15 years, and Germany needs a net 400,000 skilled foreigners every year to fill its own gap.)
In fact, the strong labor market and high wage growth are one reason why goods inflation keeps spiking; consumers can pay higher fuel and food costs right now, even if they find it deeply displeasing to do so. Inflation isn’t just a pandemic story, and it may be here to stay.
See you at 1 p.m!