Inflation and the Economy
Tuesday, February 7, 2023
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 below.
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.
Mix of Inflation Contributors Is Changing
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.
Changing Consumption Patterns
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.
Goods Inflation Is Falling
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.
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.
Unemployment Is Lowest Since 1960s
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.
Job Openings Are Plentiful
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.