On Tuesday, US Treasury Secretary Janet Yellen suggested in an interview that a slowing labor market is playing a key role in mitigating inflation, one of many factors contributing to a downward trend.
Yellen pointed out that the intensity of corporate hiring needs has been weakening. Nevertheless, she described the US labor market as cooling rather than stumbling. "The labor market is cooling, but not causing any real troubles," Yellen noted, denying the presence of active workforce reductions in businesses. Aside from a few hard-hit industries like tech, she noted that companies aren't laying off staff; rather, their attempts to grow their workforce appear to be lessening.
Yellen also highlighted a decline in job vacancy data, which she closely monitors. Recent figures showed a significant drop of 496,000 in US job vacancies in May, suggesting that the highly strained labor market might be easing.
As employment cools, Yellen predicts that falling costs in housing and automobiles will continue to help suppress price pressures.
Within the latest inflation data, Yellen highlighted some bright spots, particularly in housing. She believes these positive factors will continue. "Housing's contribution is lessening, and we have good reason to think that this will continue and further decrease. This is a significant influence on core inflation." Currently, given the long-term nature of rental agreements, rent inflation in the US has been slowing gradually.
Regarding commodities, June data showed a month-over-month price decrease, which Yellen attributed to automobiles as a crucial factor, reflecting the state of supply chains, which had suffered significant disruptions during the COVID-19 pandemic. "Used cars have played a key role in lowering core inflation. Inventories are being rebuilt. The entire auto supply chain is improving. So, we have reason to believe that we can continue to benefit from this."
Yellen also suggested that corporate profit margins could play a role in lowering inflation. While wage growth is driving inflation, she doesn't see it as absolutely necessary to further suppress price increases by controlling wages. She hinted that corporate profit margins might decrease. "Profit margins are quite high and have a certain cyclicality. So, I don't want to say that if wages don't decrease further, inflation won't drop."
However, Yellen expressed caution about the better-than-expected cooling of US inflation data for June. She warned against being overly optimistic based solely on June's CPI data, referring to it as "one month's data."
Last week, both CPI and PPI data for June were released, showing a noticeable cooling of inflation in the US. The June CPI rose 3% year-over-year, lower than expected, marking the lowest since March 2021. The core CPI rose 4.8% year-on-year, lower than expected, the lowest since October 2021. The June PPI also cooled to 0.1% beyond expectations, a new low since August 2020. The core PPI rose 2.4% year-on-year, lower than expected, marking the lowest since February 2021.
On the same day, Yellen reiterated her belief that the US will avoid an economic recession. She has consistently said that inflation could return to the Federal Reserve's 2% target without a spike in unemployment. Yellen's view was once deemed overly optimistic, but the latest data suggest she might be correct. So far, US inflation continues to cool, and the labor market remains resilient. The US unemployment rate held steady at 3.6% in June, near the lowest level in almost half a century.
