Recent economic data provides overwhelming justification, if any more were needed, that the Federal Reserve should continue or even accelerate its plans to tighten monetary policy. US inflation, as measured by the consumer price index, reached the highest level for 40 years in December, increasing to 7 per cent from November’s 6.8 per cent. That is the fastest rate of increase since the so-called Volcker shock in 1980, when the then Fed chair Paul Volcker hiked up interest rates and pushed the US economy into a deep recession to try to bring inflation under control.
Yet while the price data is eye-watering, it is the labour market statistics, published last week, that provide a perhaps even stronger justification for tighter monetary policy. While there are some signs from surveys of manufacturing companies that bottlenecks are easing, cost pressures are becoming more visible in the jobs market. That risks creating the kind of self-sustaining inflation, driven by expectations of price increases, that led Volcker to take such drastic measures more than four decades ago.
Although the pace of job growth slowed in December, the labour market still appears tight. Chiefly, annual wage growth accelerated to 4.7 per cent, failing to keep pace with prices but still above the pre-pandemic norm. While employment growth was down — the US added just 199,000 jobs — this appears to be because businesses struggled to find workers: the unemployment rate fell to 3.9 per cent, slightly above the rate in February 2020.