Weekly Economic Trends and Indicators

The Headlines:

According to the Bureau of Labor Statistics (BLS), the Consumer Price Index (CPI) for all urban consumers increased by 0.2% (seasonally adjusted) in September. This was the same rate of increase as in July and August. Over the last twelve months, the seasonally unadjusted inflation rate was 2.4%.

Last month, the BLS reported that nonfarm business sector labor productivity (the most frequently cited statistic for productivity) increased by 2.5% in the second quarter of this year. Output increased by 3.5% while hours worked increased by 1.0%. The rate of productivity change is approximately the difference between the growth rates of output and hours worked.

The Details:

The CPI inflation rate was slightly above expectations, but the amount by which it exceeded expectations was small enough that most analysts still considered this to be a good report. The sectors seeing the largest rate of increase in prices were food, energy services, apparel, transportation services, and medical care services. Energy commodities, particularly gasoline and fuel oil, decreased in price by about 4% on a seasonally adjusted basis.

The Context:

The reason for noting both the inflation news from last month and the productivity numbers from the last quarter together is that productivity can play an important role in how inflation and unemployment interact with each other. This has important policy implications—in this case, implications for the pace of interest rate cuts going forward.

One reason that the Federal Reserve’s series of interest rate increases has not yet resulted in a recession is that productivity continued to grow at a good rate. Growth in hours worked slowed down almost immediately when the Fed began raising rate in mid-2022. However, business sector output continued to grow—in fact, output grew faster in 2023 than in 2022. This unexpected result meant that productivity also grew at a faster rate than many expected.

Growth of productivity has the effect of increasing the overall productive capacity of the economy. An analogy would be to think of it as increasing the speed limit. Productivity growth allows the economy to grow faster without increasing inflation. In this case, that meant that inflation could come down even as economic growth remained positive. We also saw this in the late 1990s, which set the stage for the strong economic growth and low inflation of that period.

This could be one reason that most analysts currently still believe that the Fed will cut the federal funds target in November. While September inflation was slightly above expectations, the trend is still moving in the right direction. As long as productivity growth remains strong, the Fed can continue to address potential labor market weakness without greatly increasing the risk of re-igniting inflation.

Next week: Manufacturing Update