Tightest U.S. Job Market Since 1950s Set to Drive Inflation

(Bloomberg) -- Fueled by a persistent shortage of available workers, wage pressures will take over as the dominant driver of U.S. inflation in the second half of next year, according to Jefferies Group LLC. 

“We believe the U.S. is entering the tightest labor market conditions since the 1950s,” Aneta Markowska, chief financial economist at Jefferies, wrote in a note Monday. As a result, wage pressures are unlikely to ease next year, keeping inflation elevated even as supply chain bottlenecks abate.

While transitory factors have accounted for about 1.5 percentage points of the core consumer price index increase over the past year, tightness in the labor market is contributing nearly 1 percentage point and that “is unlikely to change,” Markowska said. Excluding food and energy, consumer inflation is up 4.6% from a year earlier, the most since 1991.

“We recognize that pandemic-related distortions have contributed to the recent wage strength by temporarily depressing labor supply, we no longer expect wage pressures to ease meaningfully,” Markowska said. The U.S. is still six million jobs away from returning to the pre-pandemic employment-to-population ratio, a goal Markowska says is “no longer attainable” in part due to retirements.

Policy makers, including many at the White House and the Federal Reserve, have attributed recent high inflation readings to snarled supply chains. The general expectation is that as those pressures ease, inflation will subside. 

But with inflation accelerating further in the final three months of this year, “there is mounting pressure on the Fed to respond,” Markowska said. “The most logical response in our view is accelerating the pace of tapering, which we expect to be announced at the December meeting.”

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