Inflation is still not over

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The labor market is still “out of balance,” Fed Chair Jerome Powell said at a press conference earlier this week, putting today’s non-farm payrolls report high up on the watchlist. Economists expect the U.S. economy to have added 185K jobs in January, down from the 223K added in December, with the unemployment rate forecast to tick up to 3.6% (from 3.5%) amid an increasing amount of layoffs. However, the bigger piece of the puzzle is wage growth, which will directly influence how central bank policymakers view the current inflation landscape and how the economy is developing.

Bigger picture: The Fed wants to make sure that new job growth slows enough to cut the gap between labor supply and demand, so that wages don’t contribute to inflationary pressures. This dislocation was seen in the recent JOLTS report that showed the number of job openings unexpectedly rising to just over 11M in December vs. 10.4M in the previous month. With almost two job openings for every job seeker, that can lead to higher wages, such as the recent increase seen at Walmart (WMT), the nation’s largest employer.

The labor force participation, which has stayed stubbornly low since the pandemic, also isn’t helping. In December, it ticked up to 62.3%, from 62.2% in the previous month, but remains a full percentage point below its February 2020 level. Remember, until the Fed’s next monetary policy decision, there will be one more non-farm payrolls report, two more consumer price index releases, as well as one on personal consumption expenditures report – each of which gives more insight into inflation dynamics. See why SA contributor Damir Tokic expects today’s payroll report will confirm an imminent recession.

Revisions on tap: There are several factors in this morning’s NFP report – published at 8:30 AM ET – that could shed new light on the state of the labor market. First off, the Labor Department will release its annual benchmark revisions that seek to iron out seasonal fluctuations with more definitive data in the establishment survey. In addition to updating the formulas, new population figures will be incorporated in the household survey – which affects the employment rate – due to fresh estimates from the U.S. Census Bureau.