Unemployment and inflation
It is strange that the US central bank, in setting monetary policy, uses precise economic figures that look only backward and not forwards. Like inflation, unemployment is by definition at the end of the process. There are plenty of leading indicators that paint a much better picture of the future, but apparently, after the miss on the timeliness of inflation in 2021, the central bank does not dare to look ahead. That’s a big difference from the past when central bankers used to raise interest rates as soon as inflation was in the pipeline, even knowing that a rate hike only has its full effect on the economy after 12 to 18 months.
Last Friday, the US jobs report was better than expected in terms of new jobs, with 223,000 instead of 200,000 expected. However, the November figure was revised downwards to 256,000. At the same time, the number of hours worked fell short of expectations and hourly wages (4.6 per cent year-on-year against 5.0 per cent last time) also disappointed. This report is too strong for the Fed to stop. Nevertheless, the Fed is likely to raise interest rates by 0.25 per cent in February. If the upcoming monthly reports are better than expected (in the sense that job growth softens), that could immediately be the last rate hike this year. The market is already counting on a rate cut in the second half of this year, but that looks somewhat ambitious.
One figure that clearly looks ahead is the purchasing managers’ data. Last Friday, the purchasing managers’ index for the services sector dipped below the equilibrium level of 50 for the first time in 2.5 years, the index went from 56.5 in November to 49.6 in December. Apart from the corona pandemic, this was the weakest index since 2009. Economists were counting on an index level of 55. The new orders component of the services ISM fell from 56.0 to 45.2! The price component also fell from 70 to 67.6.
Next Thursday, US inflation data for December will be released. Expect a month-on-month rise in core inflation of 0.3 per cent, following a 0.2 per cent rise over November. That is markedly lower than December month a year ago, and as a result, inflation will fall markedly from 6.0 per cent to 5.7 per cent. Food prices rose 0.5 per cent in December, but energy prices fell 2.8 per cent. As a result, the overall inflation rate is up 0.07 per cent last month, reducing the year-on-year rate from 7.1 per cent to 6.6 per cent. On the goods side, meanwhile, there is deflation, helped by the fall in used car prices.
