Inflation Moderates, though Wage Pressures Continue Amid Tight Labor Market

Key Takeaways:

• The Job Openings and Labor Turnover Survey (JOLTS) showed that job openings increased by 590,000 to 10.1 million in June, the highest level since the survey’s inception in 2000, according to the Bureau of Labor Statistics. The gains in job openings were broad-based, increasing in all major sectors except manufacturing, which remains near historic highs but declined 3.2 percent in June. The number of hires also jumped by 697,000 to 6.7 million, the highest level in a year. Total separations rose by 254,000 to 5.6 million as the number of quits increased 239,000 to 3.9 million, just shy of the 4.0 million record set in April. Quits in the manufacturing sector jumped by 62,000, the largest monthly increase on record. Layoffs and discharges declined for the seventh straight month, reaching 1.3 million, the lowest level on record.
• The National Federation of Independent Business (NFIB) Small Business Optimism Index fell 2.8 points in July to 99.7, the largest decline since December. The net percentage of firms expecting the economy to improve dropped eight percentage points to -20 percent. The net share of firms expecting real sales to increase over the next six months fell 10 percentage points to -4 percent, turning negative for the first time since February. The share of firms reporting "current inventories were too low" increased by one percentage point to 12 percent, 15 percentage points higher than the level seen in January 2020. The share of firms planning on increasing employment ticked down one percentage point to 27 percent but remains eight percentage points above January 2020 levels. On a related note, the share of firms planning on increasing worker compensation rose one percentage point to 27 percent, tying the record high December 1989 reading.
• Nonfarm business productivity increased 2.3 percent annualized in Q2 2021, according to the preliminary estimate from the Bureau of Labor Statistics. Real output rose 7.9 percent annualized while hours worked grew 5.5 percent annualized. However, unit labor costs ticked up 1.0 percent annualized as hourly compensation outpaced the increase in productivity. From a year ago, productivity was up 1.9 percent.
• The Consumer Price Index (CPI) increased 0.5 percent in July and 5.4 percent on an annual basis. Core CPI grew at a more modest 0.3 percent, a sharp deceleration from its 0.9 percent monthly increase in June, as used car and truck prices rose by just 0.2 percent, down from a staggering 10.5 percent jump last month. On an annual basis, core CPI grew 4.3 percent, a deceleration of two-tenths from last month, but still two full percentage points above the level seen in January 2020. Prices in some industries are growing more rapidly than before, such as food away from home, which accelerated four-tenths to 4.6 percent in July, the fastest pace of annual growth since March 2009, and owners’ equivalent rent, which ticked up to 2.4 percent on an annual basis. The Producer Price Index (PPI) for final demand of goods and services rose 1.0 percent in July, while core PPI jumped four-tenths to a monthly 0.9 percent increase. On an annual basis, headline and core PPI gains accelerated to 7.8 percent and 6.1 percent, respectively, record highs for both. Import prices rose 0.3 percent in July, a significant deceleration from the 1.1 percent gain in June and the smallest monthly increase since November 2020. On an annual basis, import prices were up 10.2 percent. The Bureau of Labor Statistics produces all three of these reports.

Forecast Impact:

While remaining elevated, inflation slowed in July as many transitory pressures, particularly from used car and truck prices, eased significantly. The reading was in line with our expectations and therefore should have little impact on our forecast. We continue to expect the transitory component of recent inflation to subside as major supply constraints are resolved and consumer spending shifts away from goods and back to services, allowing businesses to replenish inventories without simultaneously trying to meet unusually high demand. Yet as inflation in some industries abates, longer-lasting inflationary pressures may be building. The JOLTS survey showed a significant jump in job openings in June, with the number of job openings exceeding the number of unemployed persons reported in July. While a jump in openings bodes well for our expectation of continued strong payroll growth in coming months, it also demonstrates a persistently tight labor market that could continue to exert upward pressure on wages as employers compete for workers. This upward pressure on wages can support consumption but also represents increased labor costs that will likely at least in part be passed on to consumers as higher prices. The continued elevated PPI, along with the July NFIB survey showing a record number of small businesses planning on increasing worker compensation as well as average selling prices over the coming months, points to additional inflationary pressure. Strong wage growth in the food service sector is likely partially responsible for the gain in food away from home prices as the industry raises wages in order to fill vacancies to meet elevated levels of consumer demand.

Owners’ equivalent rent (OER), which tends to lag behind home prices and makes up a significant proportion of the CPI, is beginning to make gains, and we expect continued acceleration. Combined with wage-related inflation pressures, growth in OER will likely offset some of the easing in transitory inflation, which could lead to elevated inflation readings through the rest of 2021 and into 2022. The Delta variant continues to pose a risk to our outlook –consumers may voluntarily choose to stay home, preventing further shifts in spending towards services, which could potentially exacerbate supply chain issues and inflationary pressures if demand for goods remains elevated, particularly if the spread of the Delta variant in Asia leads to lockdowns or more strict social distancing measures in those countries.

Nathaniel Drake and Rebekah Gutierrez
Economic and Strategic Research Group
August 13, 2021

Opinions, analyses, estimates, forecasts and other views of Fannie Mae's Economic and Strategic Research (ESR) Group included in these materials should not be construed as indicating Fannie Mae's business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the ESR group bases its opinions, analyses, estimates, forecasts and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, estimates, forecasts and other views published by the ESR group represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.