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This edition was written by Elijah Asdourian, Alex Conner, Georgia Nabors, and David Wessel.
While inflation is costly because it erodes income, it can also increase household wealth by reducing the real value of debt. Using data from the Survey of Consumer Finances from 1983 to 2019, Edward Wolff of NYU finds that inflation produced a 2.7% increase in real wealth for those in the top percentile of the income distribution and a 52.3% increase for middle class households, which tend to carry more debt than the ultra-rich and thus see larger wealth gains. Households between the 80th and 99th percentile of the wealth distribution saw net losses from inflation. As a result, inflation partially offset rising inequality between the top quintile and the median of the wealth distribution. Inflation also generated larger increases in mean wealth for Black and Hispanic households, reducing racial wealth disparities. For households below the 40th percentile, reductions in real income exceeded the wealth gains from inflation, creating a net loss totaling about half of their mean income.
According to the Census Bureau’s Current Population Survey (CPS), the U.S. foreign-born population declined sharply at the start of the COVID-19 pandemic but has since caught up with its pre-pandemic trend. However, Kristin Butcher of the Chicago Federal Reserve and co-authors find that the CPS may have over-counted the U.S. foreign-born population after 2021. Using Department of Homeland Security data on visas, border apprehensions, and asylum seekers, the authors find that CPS estimates that the foreign-born population has increased by 4 million since the start of the pandemic are overstated by between 500,000 and 1.9 million. In addition, they show that industries with disproportionately high shares of foreign-born workers have experienced especially high labor market tightness post-COVID, a surprising finding given that the increase in foreign-born participation from the CPS would predict less labor market tightness in those industries.
Gadi Barlevy of the Chicago Federal Reserve and co-authors account for shifts in the Beveridge curve, the relationship between unemployment and job vacancies. For a given level of job openings, if the rate at which people become unemployed increases or the rate at which they find jobs falls, the Beveridge curve shifts right and equilibrium unemployment is higher. From 1970 to 1990, Baby Boomers entering the labor force and higher participation among women increased turnover and inflows to unemployment, raising equilibrium unemployment. These trends reversed from 1990 to the eve of the Great Recession as women gained maternity protections and Baby Boomers aged into more stable jobs, reducing inflows to unemployment. After the Great Recession, lower recruiting intensity, increased mismatch between workers and jobs, and greater labor force detachment reduced flows out of unemployment, shifting the Beveridge curve right and increasing equilibrium unemployment. The authors argue that the recent drop in vacancies can be understood as a leftward shift of the Beveridge curve as the quits rate falls (reversal of the "Great Resignation") combined with a rightward movement along the Beveridge curve as labor demand cools.
"I find myself thinking about two possible scenarios for the economy in the coming months. In the first, the real side of the economy slows. This is the scenario broadly reflected in the September Summary of Economic Projections by FOMC participants, where an easing in demand helps bring the economy into better balance with supply and allows inflation to move closer to our 2% objective. In this scenario…we can hold the policy rate steady and let the economy evolve in the desired manner. But I also can't avoid thinking about the second scenario, where demand and economic activity continue at their recent pace, possibly putting persistent upward pressure on inflation and stalling or even reversing progress toward 2%. In such a scenario, failing to take action in a timely way carries the considerable risk of undermining what have been fairly stable inflation expectations and possibly unwinding the work that we have done to date. Thus, more action would be needed on the policy rate to ensure that inflation moves back to target and expectations remain anchored…." says Christopher Waller, Member of the Federal Reserve Board of Governors.
"The 10-year Treasury yield is up about 90 basis points [since July]…There are several factors that have been mentioned to explain this movement, including stronger-than-expected incoming data on third quarter economic activity, an increased focus on U.S. deficits and the associated increase in Treasury issuance, as well as geopolitical events and a flight to safety. Whatever the causes, I will be watching how these interest rates evolve in coming months to evaluate their impact on financial conditions and economic activity."
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