I might be misreading the graph but is there an error in the X axis of the US Job Openings by Industry Total (Seasonal Adjusted) - Left. Its gets to July 2022 then resets to Dec 2012. I think it should be on the same time line as Job Openings vs Unemployed - Right?
Also - the labor tightness shaking out, early retirement of many and the replacement of those retirees, should be disinflationary. I know you say that trend being accelerated in the span of 2-3 years but if this happens quicker, doesn't that quickly turn an inflationary environment around?
Why do you think this will take 2-3 years for labor tightness to resolve itself? The timeframe, at least to me, seems key in how real wages will act - which will drive inflation, fed policy, and markets.
E.g. If the tightness resolves itself in 0.5 - 1 year (openings falling - companies getting leaner), we end up switching pretty quick from inflation to either disinflation or deflation.
Yes, you're correct, looks like we made an X axis error on the date. Data is clean though so our labeling is off, great catch, we'll correct for next one. You're also right on "turning the inflationary environment around." I think the headwind from the early retirement eventually fades, but whether that lightens the pressures on the labor pool enough to lower wages? Tough one. Once set in motion it's hard to reel back in. Thinking is that with 4% raises, wage inflation tends to beget broader inflation. Just anecdotally, Home Depot employees in CA (Los Angeles) receiving $17/hr, that's a $34K annual "salary," once the domain of office workers. So once uncorked not entirely sure it can be put back even if the headwinds fade. It likely won't offset it materially enough. In the end, I think it's an 80/20 issue. It'll help, but it'll likely be 20% or so, the real issue is the genie's been unleashed already. Thanks for reading!
Thanks for the answer! Unfortunately, I have more questions (or fortunately?) .
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Q1 - I was hoping for one more clarifying point. In your graphs (1: WTI & Gasoline Prices to Energy in CPI, 2: Housing Prices to Shelter (OER) in CPI, 3: Food Costs in CPI, and 4: Services in CPI) is the left hand axis contribution calculated in the following manner:
E.g. Housing Prices to Shelter (OER) March 2023 - Shelter OER (dark blue line) reading 2% (rounding up) mean 40% of the 5% CPI Print (e.g. 2% from graph / 5% CPI print).
I'm fairly positive I am correct in that interpretation but would like to confirm.
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Q2 - Looking at the Shiller Home Price Index and Housing Prices Graph - volatility in home price changes is very elevated specially over the last 2-3 years (or at least upside vol). Given it's huge contribution to both CPI and Core, this seems like a big factor to watch closely.
I can see how house prices supports your volatile inflation thesis (see process flow below) but if you have any further detailed thoughts on the home price mechanics in this picture, I'd love to get them.
rates up --> house prices down --> Core inflation down --> rate hikes delayed or rate decreases --> houses prices up --> Core up --> [potential rate action]
Something that, I believe, could throw a wrench in that dynamic is commodity inputs pricing to building price, e.g. if commodity inputs get too expensive (think underinvestment in commodity extractive industries), construction PPI gets too heated, and house prices run (or stay strong) despite the headwinds from Fed IR actions. Given how large of a contributor house prices/shelter is to Core, this seems like something to watch + something I'd like to hear more on from you.
Looking forward to future articles in this series!
I might be misreading the graph but is there an error in the X axis of the US Job Openings by Industry Total (Seasonal Adjusted) - Left. Its gets to July 2022 then resets to Dec 2012. I think it should be on the same time line as Job Openings vs Unemployed - Right?
Also - the labor tightness shaking out, early retirement of many and the replacement of those retirees, should be disinflationary. I know you say that trend being accelerated in the span of 2-3 years but if this happens quicker, doesn't that quickly turn an inflationary environment around?
Why do you think this will take 2-3 years for labor tightness to resolve itself? The timeframe, at least to me, seems key in how real wages will act - which will drive inflation, fed policy, and markets.
E.g. If the tightness resolves itself in 0.5 - 1 year (openings falling - companies getting leaner), we end up switching pretty quick from inflation to either disinflation or deflation.
Love the articles. Thanks again for your insight!
Hi Zac,
Yes, you're correct, looks like we made an X axis error on the date. Data is clean though so our labeling is off, great catch, we'll correct for next one. You're also right on "turning the inflationary environment around." I think the headwind from the early retirement eventually fades, but whether that lightens the pressures on the labor pool enough to lower wages? Tough one. Once set in motion it's hard to reel back in. Thinking is that with 4% raises, wage inflation tends to beget broader inflation. Just anecdotally, Home Depot employees in CA (Los Angeles) receiving $17/hr, that's a $34K annual "salary," once the domain of office workers. So once uncorked not entirely sure it can be put back even if the headwinds fade. It likely won't offset it materially enough. In the end, I think it's an 80/20 issue. It'll help, but it'll likely be 20% or so, the real issue is the genie's been unleashed already. Thanks for reading!
Thanks for the answer! Unfortunately, I have more questions (or fortunately?) .
-
-
-
Q1 - I was hoping for one more clarifying point. In your graphs (1: WTI & Gasoline Prices to Energy in CPI, 2: Housing Prices to Shelter (OER) in CPI, 3: Food Costs in CPI, and 4: Services in CPI) is the left hand axis contribution calculated in the following manner:
E.g. Housing Prices to Shelter (OER) March 2023 - Shelter OER (dark blue line) reading 2% (rounding up) mean 40% of the 5% CPI Print (e.g. 2% from graph / 5% CPI print).
I'm fairly positive I am correct in that interpretation but would like to confirm.
-
-
-
Q2 - Looking at the Shiller Home Price Index and Housing Prices Graph - volatility in home price changes is very elevated specially over the last 2-3 years (or at least upside vol). Given it's huge contribution to both CPI and Core, this seems like a big factor to watch closely.
I can see how house prices supports your volatile inflation thesis (see process flow below) but if you have any further detailed thoughts on the home price mechanics in this picture, I'd love to get them.
rates up --> house prices down --> Core inflation down --> rate hikes delayed or rate decreases --> houses prices up --> Core up --> [potential rate action]
Something that, I believe, could throw a wrench in that dynamic is commodity inputs pricing to building price, e.g. if commodity inputs get too expensive (think underinvestment in commodity extractive industries), construction PPI gets too heated, and house prices run (or stay strong) despite the headwinds from Fed IR actions. Given how large of a contributor house prices/shelter is to Core, this seems like something to watch + something I'd like to hear more on from you.
Looking forward to future articles in this series!