U.S. Labor Market and Inflation

SAN FRANCISCO (Reuters) – A tight U.S. labor market is still adding to inflationary pressures, though less so than in 2022 and 2023, according to research published on Monday by the San Francisco Federal Reserve.

"Declines in excess demand pushed inflation down almost three-quarters of a percentage point over the past two years," San Francisco Fed economists Regis Barnichon and Adam Hale Shapiro wrote in the regional Fed bank's latest Economic Letter. "However, elevated demand continued to contribute 0.3 to 0.4 percentage points to inflation as of September 2024."

The findings are based on an analysis of the relationship between inflation and labor market heat, measured by the ratio of job openings to job seekers. This could help inform Fed policymakers as they consider how and when to reduce short-term borrowing costs further.

The U.S. central bank began lowering its policy rate in September in response to a slowdown in inflation and cooling of the job market. After a second rate cut earlier this month, the rate now sits in the 4.50%-4.75% range. U.S. central bankers believe this level is sufficient to keep the brakes on the economy, though there is internal disagreement on its restrictiveness and the timing of further cuts.

Fed Chair Jerome Powell, who closely monitors the job-openings to job-seeker ratio, has stated that labor demand is roughly balanced with supply and that the job market is no longer a major source of inflationary pressures.

However, the San Francisco Fed research indicates that the job market still contributes to inflation, which Powell estimates was 2.3% in October according to the Fed's targeted measure, and 2.8% by a measure excluding food and energy used to assess underlying inflationary pressures.

The U.S. central bank aims for 2% inflation.