Navigating Sticky Inflation: The Labor Market Dynamics and Upcoming Federal Reserve Challenges

The Department of Labor reported today that initial claims for unemployment insurance remained unchanged at 209K, indicating that the labor market remains resilient. The four-week moving average of claims, which smooths out week-to-week volatility, fell by 3K.

As measured by the Consumer Price Index (CPI), inflation rose by 0.4% month-over-month and 3.7% annually. Forecasts were for a gain of 0.3% and 3.6% respectively. This data point further supports the view that inflation is sticky. Core CPI, which excludes food and energy prices, was in line with expectations, rising 0.3% month-over-month and 4.1% annually. Core CPI has not been below 4% since 2021.

Inflation has ticked higher at both the wholesale and consumer levels for three consecutive months. Persistent inflation, coupled with a tight labor market, suggests that the Fed may still have more work ahead. When we last experienced a period of elevated inflation during the 1970s, the Fed came under pressure and prematurely paused and reversed course, which allowed inflation to reaccelerate. The Fed had to reengage in the inflation fight, and a recession followed. The hope is that the Fed has learned from past mistakes and will thread the needle by bringing inflation down with no negative economic impact. The reality is that the Fed is a group of imperfect people with imperfect information who are prone to making the same mistakes others have made in a similar situation. If the Fed is data-dependent, as they have indicated, we may see another rate hike at the November or December meeting.