The June job market report published by the Bureau of Labor Statistics last Friday revealed that the U.S. employment market is cooling, which is an early sign of cooling inflation. The American economy added 206,000 jobs in June, down from the 215,000 jobs added in May. The unemployment rate, which is closely monitored by the Federal Reserve to make rate decisions, rose 10 basis points to 4.1% in June, marking the first time the unemployment rate jumped above 4% since November 2021. This is a clear sign of rate hikes having an impact on hiring, which is what Fed officials have been hoping for.
What Is The Connection Between Employment and Inflation?
The Phillips Curve is used by economists to illustrate the inverse relationship between the unemployment rate and inflation. In theory, rising unemployment levels in a country should lead to cooling inflation. This relationship holds in practice as consumers tend to cut back on discretionary spending when unemployment levels rise and job security becomes questionable, reducing the effects of demand-pull inflation. On the other hand, rising unemployment levels lead to a slowdown in wage growth, reducing the impact of cost-push inflation.
That said, it may take a while for consumers to feel the true effect of cooling inflation as U.S. household debt has reached a record high of $17.69 trillion. Since interest rates are still at record-high levels, this massive debt burden will continue to lead to high interest costs for consumers, negating some of the potential benefits of cooling inflation.
What It All Means
Gus Faucher, Chief Economist at PNC Financial, believes the slowing job growth and rising unemployment rate, although modest, will reduce inflationary pressures in the coming months, paving the way for the Fed to cut rates by the end of the year. Fed Chair Jerome Powell, after digesting the June jobs report, also claimed that progress has been made toward bringing inflation down to 2%. However, he went on to say last Tuesday that Fed Officials will wait for more promising signs of a sustainable decline in inflation to cut policy rates. ISM’s Steve Miller, in a note discussing the jobs report, wrote that employment readings are pointing toward a contraction in overall economic activity for the first time in 17 months.
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Dilantha is a former buy-side equity analyst who now contributes to Seeking Alpha, GuruFocus, TipRanks, and ValueWalk. He is the founder of Beat Billions, a premium investment research subscription service on Seeking Alpha’s Marketplace. He has appeared on CNBC and Bloomberg to discuss stock markets and the global economy.