Tight U.S. Labour Market, Supply Constraints Point to Persistent Inflation

By guest author Sarah Chaney Cambon from the Wall Street Journal. Gwynn Guilford contributed to this article.

Companies are holding on tightly to employees at a time when few other workers are available and prices are rising in wholesale markets facing supply constraints, both factors contributing to higher inflation.

Shortages of materials are driving up the cost of goods, while the tight labour market is pushing up wages.

New applications for unemployment benefits, a proxy for layoffs, declined to a seasonally adjusted 293000 last week from 329000 a week earlier, the Laboru Department said. It marked the first week since the Covid-19 pandemic began in March 2020 that jobless claims fell below 300000. A proxy for the number of people receiving unemployment benefits also fell to the lowest level since March 2020.

A separate Labor Department report showed steady inflation pressures. The producer-price index for final demand—a gauge of prices that suppliers are charging businesses and other customers—rose 8.6 % in September from a year earlier. That was the largest 12-month advance since the series began in 2010.

Last month’s increase was driven by rising gasoline prices, but also reflects more expensive meat, vegetables, residential electric power and chemicals. The more closely watched consumer-price index rose 5.4 % in September from a year earlier, matching the largest annual gain since 2008, the Labor Department said this week.

“Worsening supply-side dynamics and the recent acceleration in commodities prices will keep price pressures sticky and elevated well into next year,” said Mahir Rasheed, U.S. economist at Oxford Economics.

Meanwhile, the latest jobs market data point to a constrained supply of workers. The report showed that the number of continuing unemployment claims, a proxy for those receiving benefits through state programs, was 2.6 million in the week ended Oct. 2, a pandemic low.

“A big drop in unemployment claims…is the strongest evidence yet that the Covid-19 Delta wave has lost its influence on layoffs,” said Robert Frick, corporate economist at Navy Federal Credit Union, in a note.

Layoffs are easing from last year’s high levels as companies hold on to workers they have and attempt to fill positions amid strong demand. Job openings reached a record high this summer, though eased some in August. Americans are quitting their jobs at historically high rates, a sign of worker confidence in the job market. About 4.3 million employees quit their jobs in August, the highest for records tracing back to 2000, according to the Labour Department.

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While workers that leave jobs voluntarily aren’t eligible for unemployment benefits, they often can command higher wages from new employers. Average hourly earnings for private-sector workers rose 4.6 % in September from a year earlier, the strongest gain since February, according to the Labor Department.

Job creation did slow in September, but many economists say that reflects a persistent shortage of workers. The share of Americans working or seeking work declined to 61.6 % in September from 61.7 % in August and remains well below February 2020 levels.

“Employers are trying to figure out how to attract job seekers, and it’s challenging,” said AnnElizabeth Konkel, an economist at job site Indeed.

Many economists expect worker shortages to persist as long-term shifts, including accelerating retirements, keep workers from seeking jobs. Some, though, think labour shortages will ease this fall due to an abating pandemic, school reopenings and expiring unemployment benefits.

The number of Americans receiving unemployment benefits overall is shrinking after programs created to respond to the pandemic’s effect on the labour market ended in all states last month.

One of those programs provided payments to gig workers and others typically not eligible to tap unemployment insurance. Another extended payments to people who had exhausted state benefits. In addition, the federal government funded a USD 300 a week enhancement for all unemployment programmes.

Continuing claims, a proxy for those receiving payments, made to pandemic programs and all others fell to about 3.65 million in late September from about 12 million in late August, before the pandemic aid expired nationwide. That data isn’t seasonally adjusted and reported on a several week delay.

Some states have continued to process continuing pandemic claims in the weeks after programs ended, likely reflecting a remaining backlog in payments.