Inflation has been the biggest topic of conversation for what feels like forever and we’re finally starting to see signs of “peaking” inflation. The consumer price index, which measures the changes in the prices for a set basket of goods and services, stayed flat for the month of July, which is the first time it hasn’t increased in months. Even though prices are still meaningfully higher versus last year, we’re finally starting to see signs that they’re not continuing to rise at an astronomical pace. In even better news, prices for producers actually decreased slightly during the month, and producer prices tend to be a precursor to consumer prices further down the road.
Moral of the story: Policymakers have been single-mindedly focused on bringing down inflation, regardless of its cost on the overall economy or labor market. We’re finally starting to see the impact. The central bank has been slamming the brakes on the economy over the last few months by slowing demand – raising rates and decreasing the money supply in the market – and they’ve been waiting to see several data points like this before easing off the brake pedal. Their next policy meeting is in September, stay tuned for what happens next.
Consumer sentiment has really taken a beating the last few months as inflation has weighed on consumers more than COVID – sentiment hit record lows this year, lower than it was during peak COVID. Anyway, we finally saw a bit of recovery as consumer sentiment increased slightly, particularly for low- and middle-income consumers that were feeling the pinch of inflation the most. Their sentiment has been closely related to gas prices, which have finally moderated to an average price in the country now finally below $4 per gallon, down from the $5+ averages we were seeing not too long ago.
Moral of the story: Lower consumer sentiment leads to lower consumer spending, which leads to lower economic growth. On top of that, we’re hearing about hiring freezes and layoffs, which doesn’t bode well for consumers’ confidence in their income prospects. Consumers are still expecting inflation to remain elevated in the 5% range over the next year, but that inflation expectation has been slowly decreasing as gas prices have been moving lower.
But our productivity is taking a hit
Productivity (the level of output per unit of input) for the second quarter decreased 4.6%, pretty abysmal as output decreased 2.1% while hours worked increased 2.6%. This is the worst number since 1948. Labor costs increased by a whopping 10.8% as hourly labor costs increased 5.7% while productivity decreased that 4.6% – and we’re seeing unit labor costs increase at the fastest pace since 1982. We’re currently seeing a tight labor market (labor demand > labor supply = labor costs go up) in the context of two consecutive quarters of negative economic growth (output decreased) so it makes sense that the output per unit of input is decreasing overall.
Moral of the story: There could be a lot of things driving this but here’s where I’m at – a lot of jobs were lost during the pandemic – if/when you’re pruning your workforce, you’re going to prune the least productive people first. So, we ended up with a situation where you retained your most productive workers over the last two years so we saw productivity improve. Now as those less productive workers are returning into the workforce, we’re decreasing the overall productivity of the labor force. Also, it takes any new employee time to actually get up to speed and maximize efficiency – as a lot of new people have started entering the workforce in the last 6-12 months, they just haven’t climbed that learning curve to maximize their productivity quite yet.