Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / Why the Job Market Is Cooling Faster Than Inflation
Transcript
- Lucas: So the jobs report came out on Thursday, and the headline number was a shocker — only 57,000 jobs added in June. That's way below expectations, and it's the smallest gain we've seen since early 2021. Luna: 57,000 — yeah, that's barely a blip. And the unemployment rate ticked up to 4.2 percent. Normally you'd think, okay, cooling labor market, inflation should follow. But CPI is still running hot. Lucas: Exactly. That's the puzzle. The May CPI reading, the latest we have, was at 334.0, up from 332.41 the month before. Core CPI — excluding food and energy — hit 336.1, also up. So prices are still rising at a pace that keeps the Fed on edge. Luna: But the labor market is clearly softening. The Fed's preferred measure, core PCE, came in at 130.1 in May, up from 129.67. So inflation is sticky, but employment is cracking. What gives? Lucas: I think the key factor is the labor force participation rate. That dropped to its lowest level in fifty years, outside of the Covid period. People are just giving up looking for work. That actually puts upward pressure on wages — fewer workers available means employers have to pay more to attract them. Luna: Right, so even though hiring is slowing, the people who are still working are getting raises. And those higher wages feed into services inflation — things like haircuts, restaurant meals, car repairs. Lucas: Precisely. And services inflation is the stickiest component of CPI. Goods inflation has moderated a lot — used car prices, for example, have actually been falling. But services keep pushing the index up. Luna: So the Fed is in a tough spot. The economy is adding fewer jobs, but inflation isn't coming down fast enough to justify cutting rates. The Fed funds rate has been at 3.63 percent since June, and the market is pricing in maybe one cut by year-end. Lucas: And the bond market seems to agree. The ten-year breakeven inflation rate, which is the market's expectation for average inflation over the next decade, is sitting at 2.23 percent — basically flat. That suggests investors think the Fed will hold the line. Luna: But here's what I don't get: if the job market is this weak, why isn't the Fed more worried about recession? 57,000 jobs is not enough to keep up with population growth. Lucas: The Fed's dual mandate is maximum employment and stable prices. Right now, employment is still historically strong — the unemployment rate at 4.2 percent is low by any measure. So they're prioritizing the inflation side. They'd rather risk a mild slowdown than let inflation become entrenched. Luna: That makes sense. But for the average person, it's a double whammy. Your rent is still going up, groceries are still expensive, and now the job market is getting tighter. It's not a recession, but it doesn't feel great. Lucas: No, it doesn't. And this is where the disconnect between headline data and lived experience shows up. The stock market, for instance, had a great week — the S&P 500 is up 1.8 percent over the last five days, the Dow is up 2 percent. But that's partly because traders think slower growth means the Fed will eventually cut rates. Luna: So markets are cheering bad news for workers. That's a classic 'bad news is good news' scenario. Lucas: Exactly. The market sees a weaker economy and anticipates looser monetary policy. Meanwhile, gold is up 4.1 percent this week, silver up 8 percent — that's a sign of nervousness too. Investors are hedging against uncertainty. Luna: And that uncertainty is real. The labor force participation rate dropping to a 50-year low outside of Covid — that's not just a cyclical thing. A lot of that is baby boomers retiring and not coming back, plus some workers who've just become discouraged. Lucas: That structural element means the labor market might be tighter than the headline job number suggests. If you have fewer people available to work, even modest hiring can push wages up. And that keeps the Fed cautious. Luna: So what's the takeaway for someone listening? If you're employed, you might still see decent wage growth, but switching jobs could be harder than it was a year ago. And prices aren't coming down anytime soon. Lucas: Yeah, I think the key is to not expect rapid relief on inflation. The Fed wants to see sustained evidence that inflation is moving toward 2 percent before they ease. And with the labor market still relatively tight, that could take a while. Luna: And speaking of staying informed — if you find these economic breakdowns helpful, we keep the show ad-free thanks to listeners who support us. If walking through the economy with us has made something click, you can buy us a coffee — buy me a coffee dot com slash fexingo. No pressure, just a way to keep this going. Lucas: Yeah, that really does help. And we genuinely appreciate it. Now, back to the numbers — one thing I want to dig into is the composition of those 57,000 jobs. Where were the gains? Because not all sectors are created equal. Luna: Right, let's hear it. Where did the jobs come from? And where did we lose them? Lucas: Health care and social assistance led the way, as they have been for months — think hospitals, nursing homes, home health aides. That sector added roughly 25,000 jobs. Government added about 10,000. But retail trade actually lost jobs, and so did temporary help services, which is often a leading indicator. Luna: Temporary help is a classic canary in the coal mine. When companies start cutting temps, it usually means they're uncertain about demand. And retail losses suggest consumers are pulling back. Lucas: Exactly. So the jobs that are being added are in structurally growing areas like health care, while the more cyclical sectors are weakening. That's consistent with an economy that's slowing but not collapsing. Luna: And wage growth? Did the report give any clues there? Lucas: Average hourly earnings rose 0.3 percent month over month, which is about 3.9 percent annualized. That's still above the pre-pandemic pace, but it's been trending down. So wages are growing, but more slowly than they were a year ago. Luna: So the picture is: slower hiring, modest wage growth, sticky inflation. The Fed probably stays on hold through the summer. Lucas: I'd agree. The next CPI report, for June, comes out next week. If that shows another month of elevated readings, the chance of a September rate cut goes way down. But if we see a surprise drop, things could shift quickly. Luna: And the market will be hyper-focused on that. We've got a Fed meeting later this month, but with no press conference, it's unlikely they'll move. The real action is in the data. Lucas: For sure. We'll be watching the CPI release closely. Thanks for joining us on this episode of Inflation Explained. Luna: Yeah, thanks for listening. We'll see you next time.