US economy: Inflation, Employment and Interest Rates

The US economy improved in the second half of 2022 and momentum continued into early 2023, the Economic Commission for Latin America and the Caribbean (ECLAC) indicated.

The labor market has remained historically tight, with more than 1 million jobs added in the first quarter of 2023 and March marking the 27th consecutive month of employment gains, but is gradually cooling.

The unemployment rate remains near historic lows.

Inflation is also gradually slowing as the economy overcomes supply chain disruptions and aggressive monetary policy tightening begins to work to reduce excess demand.

While inflation started in goods affected by supply chain problems, as supply chain pressures eased, services prices rose.

In the 12 months ended February 2023, services prices rose 7.3%, according to Bureau of Labor Statistics data, while goods prices rose just 1% the same month, down from a peak of 12.3% in February 2022.

The Federal Reserve has been focused on developments in the labor market and, according to its chairman, Jerome Powell, employment and wage growth have to fall substantially further before the central bank pauses in its monetary tightening.

US economy

Powell has broken down the central bank’s preferred inflation measure, the core personal consumption expenditures index (at 4.6% in February 2023), into three categories: core goods, housing, and core services excluding housing.

Of these three categories, the third is the most important, as it accounts for more than half of the core CPI deflator.

In addition, core services excluding housing, which range from health care to hospitality, are labor-intensive, so the degree of labor market tightness is an informative guide to the path of inflation in service industries.

At the press conference following the Fed‘s March 22, 2023 rate-setting meeting, Powell stressed that there is no evidence yet of a disinflationary trend in core non-housing services.

At that meeting, the Fed raised interest rates for the ninth consecutive time, to between 4.75 and 5.00 percent.

More importantly, the central bank expects the benchmark interest rate to rise to 5.1 percent by the end of 2023, implying at least one more interest rate hike this year.