“Pervasive resource shortages”
Wednesday saw the release of the Fed’s Beige Book, and though “growth downshifted slightly”, the deceleration was chalked up to either “concerns due to the rise of the Delta variant” (which, if cases are any indication, may be spreading less rapidly) or growth being hindered by “supply disruptions and labor shortages, as opposed to softening demand”.
On a more granular level, as far as employment goes, “all Districts noted extensive labor shortages that were constraining employment and, in many cases, impeding business activity”. The latest JOLTS release backs up this point (though it reflects July data), with job openings increasing to a series high of 10.9 million. As Reuters discussed in a recent article, this was accompanied by an increase in “the number of workers voluntarily quitting their jobs, a sign of confidence in the labor market”. Moreover, the job openings combined with a moderate rise in layoffs suggests “lasts month’s sharp slowdown in hiring was due to employers’ inability to find workers rather than weak demand for labor”. Unsurprisingly, “a number of Districts reported an acceleration in wages,” with several noting “particularly brisk wage gains among lower-wage workers”.
On the inflation side, Districts described the pace of price increases as either strong or moderate, and “with pervasive shortages, input price pressures continued to be widespread”. What’s more, some Districts reported that “businesses are finding it easier to pass along more cost increases through higher prices” (as an aside, today’s PPI was 8.1%, “the largest advance since 12-month data were first calculated in November 2010) and, as we’ve discussed, “several districts indicated that businesses anticipate significant hikes in their selling prices in the months ahead”. There is also a growing number of “official” sources discussing the potential inflation tailwinds coming from OER. The Dallas Fed examined the house prices vs OER dynamic in a recent research piece, noting that “house price growth historically has been useful when predicting the inflation rates of rent and OER”. Taking this one step further, they “present forecasts of these inflation rates” (“6.9 percent by year-end 2023”) which will in turn contribute “about 1.2 percentage points [to core PCE] for 2023”. The White House Council of Economic Advisors is also taking note of the relationship, finding that “higher shelter prices are likely to soon show up more clearly in the monthly CPI”.
Whether prices continue to rise at the same breakneck pace remains to be seen, but it is likely no coincidence that the word “transitory” did not appear in the latest Beige Book release.
