As US Inflation Takes Off, Keep An Eye On Unemployment Data

As US Inflation Takes Off, Keep An Eye On Unemployment Data
Andrew Rummer

over 2 years ago1 min

After data showed US inflation rose faster than forecast in May, keep a keen eye on unemployment levels in the world’s biggest economy for indications of whether this pick up in prices will prove temporary or long-lived.  

Inflation-sensitive tech stocks fell on Thursday after US government data showed the consumer price index (CPI) rose 5% from a year earlier – the largest annual gain since 2008 and exceeding economists’ predictions for a 4.7% increase. 

Still, as the chart above shows, millions of Americans have joined the ranks of the long-term unemployed since the COVID pandemic hit last year. A recent pick-up in hiring has been mainly due to companies bringing back those they had temporarily laid off during lock-down. 

And, in addition, the pace of US wage growth is currently slowing rather than climbing. 

Chart of US wage growth

It will almost certainly need unemployment to drop further and wages to climb faster before inflation can become entrenched in the US economy. 

As hedge fund giant Man Group wrote in a report this week, “it is only when we see sustained wage inflation that we will finally get confirmation of our regime change thesis. It is often only when inflation starts to increase the cost of living significantly that workers feel empowered enough to ask their bosses for a pay rise.”

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