David Mericle on CPI, Labor Market, and AI's Impact on Jobs

CPI Data and Market Reaction

• 📉 The latest CPI data came in slightly lower than expected, leading to a sigh of relief in the markets and major averages hitting record highs.
• 💡 While the shelter category has been declining, month-to-month CPI figures can be erratic, but the general trend indicates underlying inflation is falling.
• ⚠️ A potential government shutdown poses a challenge for future data collection, impacting the quality of October and November CPI reports.

The Fed's Focus on the Labor Market

• 🎯 The Federal Reserve's debate is primarily centered on the labor market, with mixed signals from alternative data sources due to the absence of official September employment reports.
• 📊 Measures of labor market tightness continue to decline, suggesting a potential deterioration that warrants attention.
• ⚖️ The case for lowering interest rates to protect the labor market from further deterioration is considered sensible.

Economic Growth and Labor Supply

• 📈 While GDP growth has been solid at around 2% on average for the first three quarters, job growth has declined more than expected relative to slower labor supply growth.
• ⚠️ This disparity, with unemployment rising and labor market tightness indicators worsening, suggests a potential concern beyond just demographic shifts.
• 🧐 The economy is expected to operate near potential growth next year, with offsetting effects from tariffs and fiscal bills, but the Fed may not want to gamble on this outcome.

AI and the Future of Employment

• 🤖 Companies are increasingly focused on using AI to replace workers, leading to job shedding outside of healthcare.
• 🧠 Historically, faster technological progress and productivity growth have led to more job switching and frictional unemployment, but also temporary downward pressure on inflation.
• ⚙️ This era of faster technological progress may result in more moderate job growth compared to GDP growth, with implications for monetary and fiscal policy.