Three signs from today’s jobs show that inflation will remain high

Friday’s jobs report showed the bustling U.S. economy added hundreds of thousands of jobs, suggesting that rising prices are here to stay despite the Federal Reserve’s efforts to contain them.

The U.S. added 263,000 jobs in November, far more than the 200,000 job gains economists had expected, according to the federal jobs report released Friday. The unemployment rate was even kept at 3.7 percent, only 0.2 percentage points above the level in February 2020.

That’s not bad news if you’re looking for a different or new job, but it’s bad news for politicians worried about inflation — a big political issue for both parties.

It comes just days after Fed chief Jerome Powell signaled the central bank wants to cut interest rate hikes, raising red flags about whether that will change. Shares fell on the news before rallying before the close. The S&P 500 Index was down only a tenth of a point for the day.

Here are three data points from the report that show inflation has not cooled and will complicate the Fed’s interest rate plans.

A new report showed rapid job gains

The US has added an average of 392,000 jobs per month since the start of the year. While this is slower than the 562,000 average monthly gains in 2021, job growth is still faster than the 178,000 average monthly gains in 2019.

A strong labor market does not lead to higher inflation by itself, and without high inflation it is still possible to see strong US job creation. Despite the US unemployment rate falling to 3.5 percent in 2019, inflation remained below the Fed’s 2 percent target.

But many of the forces fueling rapid job gains, including sustained consumer spending, could also push consumer prices higher.

“The labor market looks a lot like normalizing from the pandemic and reopening shocks, and it’s not necessarily in a way that will lead to a recession,” Preston Mui, an economist at the nonprofit research firm American Work, said in an analysis Friday.

“However, we have yet to see the full impact of the Federal Reserve’s rate hikes and should look for signs of further deterioration in the coming months.”

The report noted that wages are growing faster

The main way the Fed fights inflation is by raising interest rates in a way that increases spending on households, leaving them with less money to spend on goods and services. That’s even more difficult if American wages continue to rise rapidly.

Average hourly earnings rose 0.6 percent in November — faster than the 0.3 percent wage growth expected by economists last month — 5.1 percent year-over-year. The Labor Department also revised higher estimates for wage growth in September and October, after preliminary reports showed wage growth had eased to a more steady pace.

Jason Furman, who chaired the White House Council of Economic Advisers (CEA) under former President Obama, tweeted: “The biggest news this release is the big increase in wages in September and October and the big number for November.”

“This is the second time we have seen it this year [revisions] Perhaps a nominal one that dashes hopes like this [wage] growth was cooling off,” he continued.

If people are struggling to keep up with rising prices, it may seem strange to ask them to make less money. But Fed Chairman Jerome Powell said on Tuesday that until the cost of paying and hiring workers stabilizes, it will not be possible for businesses to stop rapidly raising prices.

For that reason, Powell said, the Fed will try to reduce the number of job openings and employers’ need for new workers — the two main forces behind rapid wage growth. Without many jobs to choose from, workers will have to settle for lower wages than they could afford in a warmer economy.

“To be clear, strong wage growth is a good thing,” Powell said in comments at the Brookings Institution.

“But for wage growth to be sustainable, it must be in line with 2 percent inflation,” he continued, referring to the Fed’s annual inflation target.

The report shows that the overall labor force remains stagnant

The U.S. labor force is still about 3.5 million workers below its pre-pandemic size, and has made little progress in filling that gap.

Although a historically strong labor market and rapid wage growth have pushed millions of Americans into better jobs, the labor force participation rate and the employment-to-population ratio have declined very slightly since the beginning of the year.

While economists generally blame a combination of early retirements during the pandemic, the lingering effects of COVID-19 infections and a sharp drop in immigration, they are still unsure why more workers are not re-entering the workforce.

“Given the increase in wages, one would think that workers would be attracted to the labor market. But that’s not happening in the current economic expansion,” Joe Brusuelas, chief economist at audit and tax firm RSM, explained in an analysis.

“Long-term demographic trends of an aging workforce and declining immigration, coupled with the impact of the pandemic, are accelerating structural change in the workforce.”

These changes have caused businesses to struggle to fill open positions, raise wages to ensure adequate staffing, and raise prices to compensate.

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