Welcome to the Letter from the Chief Economist. It’s good to be back after being on the road and enjoying the last bit of summer the past few weeks.
And it’s an interesting time to jump back in: the monthly Consumer Price Index came out Tuesday, showing that prices rose 0.1% in August and 8.3% over the past 12 months. Prices for housing, food, and medical care saw the largest increase in prices. The rate of core inflation—all items not including food and energy—doubled this month, up to 0.6% in August from 0.3% in July.
The CPI showed gas prices have been steadily dropping for months, which has helped counterbalance some of the other price increases. But since those energy costs are so volatile, we can’t trust them to keep declining forever. At the same time, other items like housing change more slowly, so price increases there are more likely to persist.
So while consumer prices rising 0.1% isn’t terrible, it’s hard to be optimistic about this report. It doesn’t look like inflation is slowing down, or that it will be any time soon.
Part of the issue here is that the tight labor market is one factor causing price increases. While the individual causes of inflation have varied from month to month, labor shortages have been consistent over this period. This is happening both in the US and around the world—a “Global Demographic Drought.” We’ve been doing some exciting research on this and I’m looking forward to sharing more next week.
This puts even more pressure on the Federal Reserve as it works to bring price increases down to a more manageable level, and I would imagine it will raise interest rates once again during its next scheduled meeting next week. But no matter what they do, it’s getting harder to see how the economy can reach a soft landing from such high inflation.
Based on those fears, the markets took the CPI news hard: the Dow fell over 1,200 points Tuesday (its worst day in over two years). That reminded me of an article I read last week about how consumer sentiment is near its all-time low, according to the index compiled by the University of Michigan. What stood out to me is how there’s historically a correlation between consumer optimism and the labor market (that is, people feel better about the economy when the labor market is strong, and worse when it isn’t), but that’s no longer the case at all. The past year or so has seen the strongest labor market in decades, with record-low unemployment and record-high job openings, but none of that seems to have done much to improve consumer sentiment.
When people see their rents and grocery bills rising, it’s hard to blame them for not feeling great about where the economy is heading. But moving forward, the growing disconnect between what’s happening in the labor market and what’s happening in the broader economy seems to be solidifying, and it will be interesting to see what, if anything, will put them back on the same page.
In The Papers
Earlier this month, Gopi Shah Goda from the Stanford Institute for Economic Policy Research and Evan J. Soltas from MIT Economics published “The Impacts of Covid-19 Illnesses on Workers,” which estimates that 500,000 people are missing from the US labor market because of the disease, and that individuals who missed at least a week of work due to Covid-19 are more likely to still be out of the workforce one year later.
But it’s possible there are even more than that: in August, the Brookings Institute estimated between 2 and 4 million workers were out of the labor force because of the pandemic, “long Covid” in particular. They found that the annual cost of those lost wages alone is around $170 billion a year (and potentially as high as $230 billion).
Even as we study any number of other factors affecting the labor market, from demographics to the potential of a recession, the simple fact of a global health emergency continues to have a profound impact on the number of people working.
We’ll be watching the data to see how this continues to play out. And like I mentioned, we’ve got a lot of great new research coming out soon, and I’m looking forward to telling you more about it.
Until next week,
Lightcast Chief Economist