Labor, Inflation and The Philips Curve.

At the time of writing this, inflation is still higher than the magical 2% target that it should be and most are waiting for a Fed rate cut. Hopefully that will bring inflation down and lower interest rates for things like mortgages. 

The Washington Post reported that the jobs data from March 2023 to April 2024 was worse than previously thought. 818,000 jobs worse. I see that as a big number and one you should be concerned about because of interest rates and inflation. 

The Post mentions that these revisions should apply pressure on the Fed to lower rates, but why is this the case?

I find most don’t know that unemployment, interest rates and inflation have an usual relationship. I thought it’d be good to take a quick peak at why this is to help understand the economy we all live in and provide a little insight into an economic principle called “The Philips Curve.” 

Here it is in the simplest of terms. Unemployment and inflation are inversely correlated - meaning when one goes up, the other goes down. This principle was created by economist AW Philips - hence the name. 

So, when we have low unemployment, more money is in people’s pockets, keeping spending and demand high. That translates to high inflation and interest rates. 

Conversely, when unemployment is high, spending and demand goes down because people don’t have as much cash. Demand goes down and interest rates go down in order to get more spending to occur. 

This Washington Post article is of curious interest to me since we have not had a rate cut in several years but the jobs data it is based on is not as good as previously thought. This could be a good sign for consumers in one aspect of lower interest rates, as I mentioned at the start - for borrowing money for a car or mortgage. 

Unfortunately, we must consider the other side of the Philips Curve and remember what is good for us may not be so great for someone else. Interest rates on “safe” accounts like High Yield Savings Accounts, CD’s and similar financial tools goes down. And, possibly worst of all, it means more people are unemployed. 

It is a good reminder that our economy is not an individual game, it is a community economy with complexity and interconnectivity to each other. 

Here is a link to the original article. 

https://www.washingtonpost.com/business/2024/08/21/job-gains-revisions-federal-reserve/

As always, if you come across a financially related article you’d like to send my way please do! 

Best place to send them is to me.

More next time!

Jonathan