What a hot labor market means for inflation

new York
CNN
—

The US job market is still hot. This raises the question of how quickly inflation will cool down further.

The economy added a staggering 254,000 jobs in September, according to data from the Bureau of Labor Statistics on Friday. That exceeded economists polled by FactSet expected gains of 140,000 jobs and marked a jump from the upwardly revised figure of 159,000 in August. The unemployment rate fell slightly from 4.2% to 4.1%.

This comes after the Federal Reserve cut interest rates by a huge half percentage point last month, signaling that it is turning its attention from containing inflation to maintaining a stable labor market. After the strong jobs report, traders increased their bets for a quarter-point cut in November, as opposed to a more drastic half-point cut, according to the CME FedWatch tool.

Investors say the better-than-expected jobs report suggests a soft landing, or a scenario in which inflation is curbed without a recession, is within reach. But some warn that a continued strong labor market could make it difficult for inflation to cool further. That's because a low unemployment rate and a hot job market mean a strong American consumer whose spending is helping drive up the cost of goods and services.

“Now that the Fed has initiated its easing measures, the risk of recession has collapsed. “Markets need to keep a closer eye on inflation as there are currently political risks on both sides of the economy,” wrote Seema Shah, chief global strategist at Principal Asset Management.

Investors will get their next insight into inflation this week with two key reports. The Bureau of Labor Statistics will release September's consumer price index on Thursday, with wholesale inflation figures following a day later.

Inflation data in recent months has been encouraging. The personal consumption expenditures price index, the Fed's favorite inflation gauge, rose 2.2% in the 12 months through August, compared with the annual rate of 2.5% in July. Consumer inflation fell in August to its lowest annual level since February 2021, continuing the cooling trend of recent months.

“The Fed may be worried that inflation is rearing its ugly head,” Gina Bolvin, president of Bolvin Wealth Management Group, wrote in a note Friday after the strong September jobs data. “We may be back with them focusing on a 50/50 dual mandate.”

Shares rose slightly at the start of the fourth quarter after posting their best results since 1977 in the first nine months of the year. Markets were volatile at the start of October as the escalating conflict between Israel and Iran sent equities reeling and sent crude oil prices higher. The strong jobs report helped all three major indexes post weekly gains.

While oil prices are currently well below their highs of last year or the $100 a barrel mark they broke during Russia's invasion of Ukraine in 2022, some analysts say crude oil prices could rise if the Conflict in the Middle East expands even further. An increase in energy costs carries the risk that inflation will also rise.

Still, investors are breathing a sigh of relief after the International Longshoremen's Association, the union that represents 50,000 members covered by the contract with the United States Maritime Alliance, resumed work on Friday. The resolution from both sides allayed concerns that the strike, which ultimately lasted three days, could disrupt supply chains and lead to shortages of consumer goods and supplies.