More Jobs, Less Inflation? – WSJ

Tightening labor markets are supposed to make for higher inflation. But at least in the months ahead, the faster the job market recovers, the less serious some inflationary pressures might be.

The Labor Department on Wednesday reported that consumer prices rose 0.4% in February from January, driven by rising gasoline prices. Excluding food and energy items—the so-called core, which economists use to better track inflation’s underlying trend—prices rose by just 0.1% on the month. Versus a year earlier, overall prices were up 1.7%, and core prices were up 1.3%.

So not much inflation, but that is about to change. For starters, year-over-year comparisons are about to come up against the early stages of the Covid-19 crisis, when prices fell. That isn’t all, though. With vaccinations rolling out and another round of government relief landing soon, economists have been upping their inflation estimates. Forecasters polled by The Wall Street Journal now believe overall consumer prices as measured by the Labor Department will be up 2.8% from a year earlier in June; six months ago, they had penciled in 2.2%.

A fair amount of the increase in inflation will probably come from the simple dynamic of supply struggling to meet demand. As the pandemic, with hope, subsides, there will be an unleashing of pent-up demand for services as people go on vacations, take flights to see family and begin eating out at restaurants, again. And thanks to the ample savings many households have built up over the past year—which look as if they are about to be augmented with another round of government support—there will be money to spend. Goods prices could also remain firm, argue Morgan Stanley economists, because inventories are low and supply-chain problems persist.

The potential offset to any rise in service prices, in particular, is that after a horrible year a lot of businesses will be interested in selling as much as possible. Restaurants can raise prices if there is a lot of demand, for example, but rather than seeing people lined up out the door, glancing at their watches and leaving, the better option may be to get those diners seated. So building back capacity could be a big focus.

A fair amount of the increase in inflation will probably come from the simple dynamic of supply struggling to meet demand. A Target store parking lot in Emeryville, Calif.


David Paul Morris/Bloomberg News

But oftentimes in services sectors, capacity is people. Somebody needs to make the bed, serve the food, cut the hair and tell passengers to put their tray tables up. So businesses will need to hire.

There could be limits on how quickly they can do that. Some are financial: Until more money is actually coming in the door, many small businesses in particular aren’t going to bring more people on. Some are logistical: There were about two million fewer people working at restaurants and bars last month than a year earlier, and sorting that many people back into jobs will take time. Complicating matters, a lot of service-sector businesses have closed as a result of the pandemic, so getting capacity back to where it was won’t be so easy.

Still, despite the hurdles, if demand does pick up, it should be met by an increase in hiring that could, at least in the short run, help alleviate price pressures. Beyond that, of course, the story is different: The faster the job market comes back, the more persistent any increase in inflation will likely be.

Write to Justin Lahart at

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