"Inflation hasn't ruined everything. A dime can still be used as a screwdriver." - H. Jackson Brown, Jr.
"It's tough to make predictions, especially about the future." - Yogi Berra
The Federal Reserve is meeting today and tomorrow for it’s regular review of the economy and what, if anything, to do about it. This is also one of the meetings when the Fed announces its member’s economic projections. Nobody expects the Fed to raise interest rates at this meeting, but everybody will be watching and listening for clues on when they plan to start doing so, and if they’ll begin earlier than anticipated.
As we’ve discussed before, the Fed is viewing the recent spike of inflation as something they’ve planned on, a goal realized, and something that’s also likely to be short lived. In other words, the Fed added a bunch of fuel to stoke the economy’s fire during the worst of the pandemic and a flareup was to be expected. Eventually the flames will settle, and we’ll be back to the slower burn we’ve grown accustomed to. Or at least that’s the plan. The Fed has a tough job, no doubt about it.
It took a while to kick in, of course, but we now see the fiery part of this playing out around us every day. Grocery and gas prices seem higher. New and used cars and trucks are more expensive. Housing costs are soaring. There are tons of anecdotes of increased demand just as a wide variety of supply chains across the globe struggle to keep up. Name the industry and it’s being impacted. There are even reports of long lines awaiting visitors at national parks. Lots of activity after a prolonged lack of it equals inflationary pressures, but will it last?
Across the country people (generally speaking) have less debt, more cash, and are feeling the so-called wealth affect that comes from soaring home and stock market values. Much of this is psychological, but how we feel about the economy is important because it impacts how we spend. And if consumers feel like prices will be more expensive in the future, they’ll buy now, stoking more inflation.
Workers are also feeling their oats a bit as our economy picks up. Nationally, the unemployment rate has continued to decline in part because more people are dropping out of the labor force. They’re retiring early, exploring opportunities, taking a crack at the Great American Novel from a beach in Fiji, and so forth. And a growing number of those who plan to remain employed are switching jobs.
While all this is important for the economy and impacts inflation, the latter point, the job switching, is something the Fed watches closely. The so-called quit rate is measured in the Job Opening & Labor Turnover Survey (JOLTS) and is a key indicator for how healthy the labor market is. It’s seen as positive when workers feel confident enough to jump ship and head to another employer. And since they typically do this for more money, this activity helps drive wage growth within the economy and has a direct impact on inflation. A high quit rate isn’t a problem if it’s a blip, but if it persists those extra costs for employers have to go somewhere, like increased prices for consumers.
This week I wanted to share some snippets of analysis and a few charts about JOLTS and the employment situation from my research partners at Bespoke Investment Group. Yes, looking at JOLTS data is a bit wonky, but the Fed will undoubtedly be looking at the same information, so it’s helpful to have a general understanding of the numbers.
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