Inflation and the Economy

Ask the SF Fed: Inflation and the Economy (video, 30:25 minutes).


Watch our discussion from February 7 on inflation and the economy. Our featured speaker, Sylvain Leduc, answered pre-submitted questions from the public in a discussion with our host moderator, Laura Monfredini, Senior Vice President. Key topics included the drivers of high inflation, current labor market dynamics, and the Fed’s efforts to restore price stability.

This discussion was a livestreamed event open to everyone and is available as a recording above.

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About the Speaker

Sylvain Leduc is Executive Vice President and Director of Research at the San Francisco Federal Reserve. As Director of Research, Sylvain oversees the development of key economic research and analysis that informs the decision-making process on monetary policy. Read Sylvain’s full bio.

Quick Clips

Mix of Inflation Contributors Is Changing

Mix of Inflation Contributors Is Changing. February 7, 2023 (video, 00:54 minutes).

Core services inflation has been rising over the last year while goods inflation and energy inflation have been moderating in recent months. This means the mix of inflation contributors is changing, and that services is becoming a more substantial part of overall inflation.


I talked a little bit about energy, and those are the green columns here. You see that, for a while, in the middle of 2022, the green bars are bigger, because of energy prices that I just talked about at the beginning. Now, those contributors are shrinking as energy prices are moderating. The flip side of this is core services, those have been growing over time. If you look at these bars, core services have just been rising. And the goods price inflation that I just mentioned, those bars have been shrinking. You see that the bars now are smaller than they were a year, a year and a half ago. That’s why there’s so much focus now on services, because they’re becoming a more substantial part of inflation.

Changing Consumption Patterns

Changing Consumption Patterns. February 7, 2023 (video, 01:11 minutes).

Spending patterns on goods and services were following trend lines until things abruptly changed when the pandemic arrived. People switched to buying more goods while cutting back on services. Now these trends appear to be reversing. Goods consumption is moderating while services consumption is increasing back toward its pre-pandemic trend line. This suggests the economy may be normalizing.


If you look at these two charts, so goods and services, if you look at goods before the pandemic, we’re kind of moving along what looks like a trend line. The economy is growing, your spending on goods is growing as well. If you look at services, it’s the same thing, it seems to be just chugging along here. And then with the pandemic, things changed completely. Now, we start switching to buying more goods. So, the consumption of goods started growing really fast. And we cut down on the consumption of services, because no one wanted to be impacted by the virus. We didn’t want to go to the movie theater, go to the restaurant, et cetera. And so you got this pattern. What’s interesting right now is that it appears that the economy is normalizing, to some extent. The consumption of goods is coming back down a little bit, and the consumption of services continues to grow towards the trend line, towards where we would’ve been had we just kept going along the trend lines that we had pre-pandemic. The economy seems to be normalizing, and that’s a good thing.

Goods Inflation Is Falling

Goods Inflation Is Falling. February 7, 2023 (video, 01:56 minutes).

For the better part of twenty years we had roughly no inflation in the goods sector, largely due to technological advancements and manufacturing offshoring. That changed during the pandemic as demand for goods surged while supply chains were disrupted, leading to high inflation. Now we’re seeing a rapid decline in goods inflation as supply chains recover and consumption patterns begin to shift back to pre-pandemic trends.


Goods here is basically think about you’re buying gym equipment, you’re buying clothing, you’re buying appliances. What was fascinating with this chart is that if you look at 2000 to 2020, basically the series were showing zero inflation on average. This thing moves up and down. So, it’s less persistent and it tends to be more volatile than services. But for the better part of 20 years, we had zero inflation in this sector. Why is that? Part of it is that there’s a lot of technological progress in manufacturing. We had offshoring to lower-cost countries in Southeast Asia, in particular, that kept prices down, and made it easier to have a low inflation rate in this sector. But of course with the pandemic we’ve seen a big change. We started buying goods, we started buying gym equipment, because we had nothing else to do and so you saw goods price inflation really shooting up, which is very striking compared to the previous. We had 10% inflation in this sector compared to 0% over the previous 10 years, so it’s really notable. But what’s also encouraging is that we’ve seen a big, rapid decline now in this category, in goods price inflation. This is really encouraging in part because supply chain disruptions that we’ve experienced over the past two years are really improving. If you look at delivery time, this has come down to where we were before the pandemic. If you look at the number of boats that are waiting to be unloaded at the docks, around ports in the US, it’s really coming down. So the supply side is improving, this is moderating, keeping prices down a little bit more than what we had seen.

Services Inflation Remains High

Around two-thirds of US consumption is in services. Inflation in the sector is currently much higher than the pre-pandemic levels we saw in the 2000s and 2010s. This is a concern for policymakers as services inflation tends to be a bit more persistent than goods inflation, and more affected by rising labor costs.


Let’s just look at services inflation, and how it’s been evolving over time. As, Laura, you mentioned, this is like you’re going to get a haircut, you’re going to the restaurants, go to a hotel. Medical care is also part of this component. So it’s a big component, we mostly consume services. Two thirds basically of the basket of goods is services, the rest is goods. But this is an important part of the economy. If you look at this right now, the level of inflation in services is really high, more than 5%. What’s worrisome is that we haven’t seen much improvement lately. You see this going sideways, but nonetheless still very high, and much higher than we’ve seen in the past. If you looked at the level you had in the 2000s, between 2000 and 2010, we’re much higher than that, and much higher than where we’ve been over the 10 years preceding the pandemic. This is problematic, concerning to policy makers, because of features in services. Services inflation tends to be a little bit more persistent, and also tied to the labor market a little bit more, just because a little more of the cost component of services is labor.

Unemployment Is Lowest Since 1960s

Unemployment Is Lowest Since 1960s. February 7, 2023 (video, 01:42 minutes).

Right before the pandemic, the labor market was strong and the unemployment rate was below 4%, its lowest level since the 1960s. That was derailed by the pandemic, which saw unemployment surge to 14% as the economy shut down. However, unemployment quickly recovered due to strong fiscal and monetary support, as well as improving health conditions. Now the unemployment level is even lower than it was at the end of 2019.


One measure we often look at is the unemployment rate. This measures the number of people that are out of work, but that are looking for a job. So you can see the evolution here since 2010. Right before 2010, we had the great financial crisis, and unemployment shot up. Since then, you could see the unemployment rate starting to go all the way down. It took a while for this to work itself out, but by right before the pandemic in 2019, right here, we had a job market that was really, really strong. We had the unemployment rate below 4%, and we had to go all the way back to the ’60s to find something that low. But of course, that got derailed by the pandemic, and you see this. All the gray bars that you’ll see in the charts I have today, they always denote recession. With the pandemic, as the authorities, when we closed down the economy, the unemployment rate just shot up to more than 14%, and so we reached that level. Since then, the unemployment rate came back down relatively quickly. The economy reopened, the virus abated a little bit, and we had strong support from government. Monetary policy was extremely accommodative, we lowered interest rate to essentially 0%. We supported the economy very strongly and so, the unemployment rate started declining. By now, what’s really striking is, we’re back to where we were pre-pandemic, according to this measure. In fact, the unemployment rate is even lower than when we were at the end of 2019.

Job Openings Are Plentiful

Job Openings Are Plentiful. February 7, 2023 (video, 00:58 minutes).

Job openings is a measure that tracks how many open positions exist in the economy per unemployed worker. This data started to be collected in the early 2000s. Currently, the level of job openings is the highest on record, with approximately two job vacancies per unemployed worker. This suggests historically strong demand for workers and ongoing resilience in the labor market.


This is the number of job openings that are out there per unemployed worker. It gives you a sense of how easy it is to find a job if you want to get a job. This is data that were starting to be compiled in 2000, 2001, so about 20 years ago we started collecting that data. If you look at that series, this is the highest it’s been since we started collecting it. Basically, you have about two jobs that are open, two vacancies per unemployed worker. Again, it looked like the labor market is really strong. Along all these measures you’d say, “Okay, the Federal Reserve and the economy is doing well in terms of the maximum employment side of the mandate.” But of course, that’s only one part of the mandate, so we have to look at inflation also. And there, as we all know, things have been more challenging over the past two years.