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Economic & Housing Weekly Note

Labor Cost Pressures Threaten to Extend Already High Inflation

June 11, 2021

Key Takeaways:

  • The Consumer Price Index (CPI) grew 0.6 percent in May and increased 5.0 percent on an annual basis, according to the Bureau of Labor Statistics. Increases in clothing, auto, and airline prices helped push core inflation up seven-tenths from April and 3.8 percent from a year ago.
  • The National Federation of Independent Business (NFIB) Small Business Optimism Index ticked down two-tenths to 99.6 in May. More firms are beginning to cite inflation as their single most important problem, but for now, quality of labor and taxes remain the top two most named issues.
  • The Job Openings and Labor Turnover Survey showed that job openings increased by a whopping 1 million to 9.29 million in April, according to the Bureau of Labor Statistics. The openings were broad-based across sectors, but over a third were concentrated in the accommodation and food services industry. Comparatively, total hires only increased by 69,000. The quits rate ticked up a tenth.
  • Consumer (non-mortgage) credit outstanding expanded by $18.6 billion in April, according to the Federal Reserve Board. Nonrevolving credit (mainly auto and student loan debt) grew $20.6 billion while revolving credit (mainly credit card debt) fell $2.0 billion. Nonrevolving credit grew steadily throughout the pandemic whereas from the prior peak in February 2020, revolving credit was down 12.2 percent in April.
  • The real U.S. trade deficit narrowed in April for the first time this year, declining $7.2 billion to $98.6.2 billion, according to the Census Bureau. Imports fell 2.7 percent while exports edged up 0.3 percent.
  • U.S. household and nonprofit organization net worth – the value of assets minus liabilities – rose $5 trillion in the first quarter to $137 trillion, according to the Federal Reserve. Real estate, checkable deposits, and corporate equities drove the gains. Owners’ equity in real estate increased $820 billion, the largest gain ever recorded. Owners’ equity in real estate as a percentage of household real estate value improved to 67.3 percent, the highest share since 1989. Single-family mortgage debt outstanding rose 4.4 percent annualized.
Forecast Impact:

The much-anticipated May CPI report showed annual inflation at 5.0 percent, the fastest pace since 2008. Tempering this eye-popping reading are base effects from last year’s price declines and what we believe are temporary price increases related to the reopening of various service industries and chip shortages in auto manufacturing. Car and truck prices (used and new) accounted for nearly half of the gain in headline inflation. We believe CPI inflation will have a near-term peak in June as base effects pass thereafter but inflation will likely remain elevated through the beginning of 2022 as reopening continues and housing costs begin to flow into inflation measures (see here for our recent Housing Insights on this topic).

A key upside risk for inflation moving forward is labor tightness pushing up related costs. Measures continue to point toward an extremely constrained labor market in the second quarter. The net share of small businesses planning to increase employment hit an all-time high in May, as did the share of firms with job openings that they were unable to fill. Job openings in April were at the highest level ever recorded while hires lagged. We believe hiring will pick up substantially in Q3 as unemployment benefits expire, schools reopen, and workers return to offices, helping to revitalize accompanying sectors. In the short run, however, upward wage pressure appears to be building and these higher prices would likely be passed on to consumers.

Household wealth improved in Q1 thanks to rising home prices, stimulus checks, and increases in the stock market. This, along with the still-elevated saving rate, indicate that consumers continue to have significant spending power at their disposal. We expect to see consumption expenditures post another double-digit annualized gain in the second quarter before decelerating significantly.

Rebecca Meeker
Economic and Strategic Research Group
June 11, 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.