Stagflation now.
Inflation and unemployment claims both higher with today’s data, a bad combination. The overall CPI rose by 0.4 percent for August, a bit hotter than expected, bringing the 12-month trend rate up to 2.9 percent, while the core CPI was up by 0.3 percent (as expected), pushing the trend rate up to 3.1 percent. Meanwhile, the weekly unemployment clams jumped to 263,000 for the week ending September 6 — the highest level since October 23, 2021. While not a high figure historically, this surge in claims is worrisome — could it indicate that the job market is starting to weaken at a serious pace?
The Federal Reserve’s dual mandate of stable prices and the lowest unemployment consistent with that inflation goal is more difficult when they move in opposite directions, as they appear to be now. We have warned for some time that sharply higher tariffs are a negative supply shock that acts to slow growth and raise prices — as it appears is happening in the US economy today.
Financial markets are strongly convinced that the Fed will fight the unemployment battle first, with a 100 percent probability of a rate cut at the September FOMC meeting next week — the only question being if it will be a 25 or a 50 bps move. The Fed usually attempts to not surprise markets, and the odds still favor a 25 bps move rather than 50. This suggests that the Fed will actually cut by 25 bps next week and it will observe the job and inflation markets before the October FOMC meeting. If the job market continues to worsen, the Fed would ease further then — probably by 50 bps (unless inflation jumps even more). But if the Fed is increasingly concerned that the combination of slower nonfarm payroll gains (both with the monthly employment report over the past several months and the recent benchmark revisions) as well as today’s unexpected jump in weekly claims puts the economic expansion at risk, then the Fed could ease by 50 bps next week despite market expectations of 25 bps.
Whatever the Fed does next week, a modest (so far) case of stagflation has hit the US economy based on the data of the past several months.
David W. Berson, Ph.D., CBE
Chief Economist
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