Charts of the Week: Growth ≠ Inflation

If Fed cuts succeed in supporting a rebound in growth, will inflation pick up as well? And if that’s true, doesn’t it put the market in the penalty box – growth is either slow (which is bad) or inflation is a problem again (which is also bad). But history doesn’t support this negative skew. Growth and inflation are less related than you might think. Sure, the late 70s were the well known example of inflation resurgence after Fed cuts, but that era looks more like the anomaly than the rule.

Even with big cuts (100bps in a year qualifies), inflation has only accelerated a quarter of the time. That probability is even lower outside recessions or in “soft landings.” In many ways, this dataset supports two takeaways: 1) More often than not, the Fed gets it right, and 2) Inflation, especially inflation that’s a problem for the market (above 4.5%), is a whole lot harder to generate than you might think – just ask Japan (or China).

Even an acceleration in job growth, which does seem likelier than not over the next year given the strength in profits and the upward revision in income, doesn’t typically translate to upward pressure on wages or inflation. Over the last 25 years, job growth accelerations and decelerations carry roughly the same odds of an accompanying acceleration in inflation – both 50/50. There is an inflationary nuance to the labor market that the unemployment rate and overall growth just don’t seem to fully capture. The behind-the-scenes rebalancing looks to have more influence.

When job openings are declining, our current situation as the labor market renormalizes, rebounds in growth aren’t reflationary ones. This cycle has been and continues to be different. Those differences have mattered historically. And many of them continue to point to decelerating inflation, even with a potential rebound in growth.

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