Quits and hires rate are now a notable step below 2019 levels.

Quits does better predicting labor market conditions and there's an increasing trend in job openings across the 21C. So, at this critical moment, worth weighing quits more when we are watching labor market. /1 If the concern is in (wage-inertial?) services, hires and quits levels are also below there, and have been falling consistently.

There has been a lot of shifting and upgrading in the labor market during the recovery, and that process has played itself out. Time to reassess. /2

6-month core PCE: 1.86%
3-month core PCE: 1.52%

A year ago these numbers were above 4 percent. I understand the yawns and the sense it's old news, but this is just a massive and wild achievement. Let's dig in and discuss the last mile and what just happened. /1 Last mile: weighted contribution to overall inflation by major categories over past 6 months.

We are at 2%. Core goods pull that down about -0.5%; easy to see how to replace that. For all the fears on non-housing inflation, it's only pulling up 0.2% compared to 2018-2019. /2

Just to go back to this for a minute, worth flagging that in the current New Keynesian grad textbook:

whether end of a transitory cost-push shock causes the price level to go back to previous trend (i.e. negative inflation) is a policy choice by the Fed; it’s not inevitable. /1

https://twitter.com/NickTimiraos/status/1747983667211714810

That model isn’t ideal - there’s no long-term costs to recessions - but it gives a sense. And given that we didn’t force a recession in response to reopening while long-term inflation expectations remained anchored, the choice looks like the right one. /2

https://twitter.com/paulkrugman/status/1748328927892848999

Before we dig into an interesting upside CPI report, we now have the full 2023 data now.

And we can see, using the best proxy we have for core inflation going back to the 1940s, that 2023's disinflation looked like the post-WWII period, not the 1970-80s one. Remarkable story.
/1 Big story is leveling out of core CPI inflation over the past 5 months in the low 3 percent range. I'm curious how next month's retroactive seasonal adjustment impacts this, and throughout the past years we've seen these leveling out then down shifts during the disinflation. /2

And there it is: even though we're well into the recovery, and have had unemployment under 4 percent for 2 full years, 2023 had the 5th highest job growth in the 21st century. (6th as a percent of employment.) Note the contrast with the 2010s below.

Let's dig into December. /1 You can see job numbers having more variance over the past six months, especially coming off the big job growth the past two years. That means we should be more careful not to read too much into any one month.

And stepping back, this is the job gain rate of a soft landing. /2

Well #JOLTS was fun while it lasted. Here's quit rate vs inflation over the past ~20 years. November 2023 is hard to read, because it's so in the middle of the best values.

There's nothing to see here other than a solid labor market alongside big disinflation.

But but but... /1 But but but....job openings!

Whatever relationship is there, we've completely slid off of it. We all had a blast debating whether 'the Beveridge Curve is steep so declines in v/u could come mostly from v' it....was a nonstarter? We just got the disinflation without it.

Why? /2

I'm open to it, the arguments will evolve, but here's some reasons - empirical and theoretical - why I don't find the idea that a nonlinear Phillips Curve, one using job openings over unemployment for demand, is convincing against the evidence we have for disinflation in 2023. /1

https://twitter.com/GautiEggertsson/status/1741195631207518651

My key one: The disinflation we saw was simply too big to fit into nonlinear estimates for v/u's effects.

In @GautiEggertsson paper, if I follow it correctly, you need v/u to drop from 1.9 to at least 1 to get -3% core CPI. But v/u is currently 1.5.
/2

https://twitter.com/GautiEggertsson/status/1741195630062551130

Wow. And there you have it. Six-month core PCE is at 1.87 percent, under the Federal Reserve's 2 percent target.

I was cautiously optimistic about 2023 - I have some 'soft landing' blog posts from a year ago - but this disinflation is far beyond what I imagined. Let's dig in. /1 I still automate this graphic but took it out of active circulation, but it is worth sharing. We focus on 3-, 6-, and 12- month changes for good reasons, the monthly data is noisy.

But look at the sharp drop-off in monthly this year. It's a giant cliff, and it's just wild. /2

I understand why everyone is nervous, I am too, especially going into this morning's jobs report.

But this print is basically exactly what you'd want and expect to see from a soft landing, where inflation is falling because the difficult reopening process is over. /1 Wage growth is in line with what we'd want for lower inflation. Nobody should reevaluate anything based on one month; over the last several we're seeing a slow deceleration consistent with other labor market indicators. /2

Before we dive into this excellent PCE inflation print, let's step back and look at inflation's slowdown against the unemployment rate.

This disinflation is simply unprecedented in the past 60 years. But the supply shock challenges from reopening were equally unprecedented. /1 Look at it again, just with values less than 0, so deceleration in year-over-year change.

If you want to know why economists thought you needed 8+% unemployment to slow inflation, this historical graphic is why. But it also tells us this time was different.

Now let's dig in. /2

Quits remain at 2019 levels, hires are below. This, to me, is the central labor market JOLTS story. The labor market is not overheated from the POV of searches and mobility. /1 Why not job openings? Job openings have a time trend, but more the idea that there's a nonlinear relationship, where v/u must fall for inflation to lower, has not panned out in 2023.

But there's a worse problem.... /2

Interesting. Nominal ECI wages are steady or slightly higher in Q3. This is ~1% higher than the job number's average hourly earnings, which is more between 3.5 and 4% now.

(There is one thing in this data the screams "supply shock" I'll get to in a minute.) /1 For what it's worth, the Federal Reserve's favorite measure - private wages excluding incentive paid occupations - is much lower for the quarter, even near prepandemic levels. /2

Out with a cold (solidarity to all others with small kids getting colds left and right) so no deep PCE dive this morning.

This month, like CPI, saw a hit back up. But trend remains downward, with 6-month core PCE rate now under 3% (!) 2 times in a row. That's great progress. /1 It's great for inflation to come down, but last 3 months might have been too low given fundamentals. We'll see. But this range is what we want.

Most wild thing is that last month's core PCE was revised down to 1.4% (from 1.8%); that puts last month's 3m right at 2% target. /2

Core inflation came in as expected, but the monthly value was driven by a big pop in shelter inflation offset by negative core goods. And after a few months where non-housing services was below pre-pandemic levels, we have a 2nd month of slightly higher values.

Let's dig in. /1 First, to visualize core inflation itself, recent reversal aside, we see 6-month trending downward nicely within 2023.

Target for CPI is more like 2.5% (long story), and that we comfortably have something in lower half of 3% already with a strong economy is very comforting. /2

Well that's about the best inflation print ever. Core PCE has a monthly value below 2 percent annualized (the Fed's target) for the first time since the lockdowns.

But under the hood it's even better - it's all in the right directions. Let's dive in. /1 This month had zero inflation in core goods and further slowing in services, especially non-housing services. This is exactly the scenario we want to see.

(Last month had the opposite, with negative goods masking a pop in services; why the Fed started using this distinction.) /2

There's going to be variance. After 2 months of core CPI inflation at or below 2017-2019 levels, we have a number that popped higher. (Though this 1-month number is still lower than any number since 2022 outside the previous 2.)

Let's dig into what's going on underneath this. /1 You can see the strong downward trend in 2023 by looking at the 3-month and 6-month values, which clock in at 2.4 and 3.7 percent respectively. Contrast that to values around 6 percent in 2022.

What's driving this, and what does it mean for the second half of 2023? /2

So let's jump right in: this month was right on the 2018-2019 average, but revisions lowered previous two months, especially, as you can see, for June. So labor market softening to watch here.

What's going on with that unemployment number? I have a take. /1 Unemployment rate increased to 3.8 percent. Here is a graphic of the four categories in that.

To me, and I may reverse this take with more analysis, is that this is driven more by "new entrants and reentrants" than not temporary job losers, though that number did tick up too. /2

Solid inflation report. Today we see 2 months of prepandemic levels of core inflation in a row. I added two lines which correspond to the two previous iterations of inflation panic in this recovery - we're distinctly down.

But there's some trends underneath worth flagging. /1 First best news - another month of 0% goods inflation, stripping out used car prices (which are pulling them down more).

In the 21C through COVID, goods inflation has been around zero, completely invariant to demand conditions. Are we back? If so it realigns inflation debate. /2

There it is: core inflation right at 2017-2019 levels. This is preloaded - and look, it's right there!

This is after ~9 months of it being stuck around 5 percent. More, when we look under the hood, there's reasons to believe this may continue. Let's dive in. /1 Looking at the three layers of inflation the Fed has emphasized (this is in units of contribution to inflation), all positive developments:
- Core goods at zero
- shelter continuing its decline
- rest of core goods has the lowest level since the recovery started. /2

Once again, core inflation moves sideways this month. It's lower by an important step than it was last year, but still one step above where it was pre-crisis.

However, under the hood, there's important shifts happening. Let's dive in. /1 The story you are going to hear about is in this graphic. There was a lot of debate about shelter, but it slowed yet again this month - maybe the data is finally catching up?

But goods had a giant jump up, more than offsetting that. And rest of core services remains elevated. /2

Another hot core CPI print. You can note it increased versus last month, but the bigger thing is it is just moving sideways in this range over the last several months.

Let's dive in to see what's underneath all this. /1 In something I didn't anticipate - you can see that my automated code wasn't written to adjust if this happened - the 3 and 6 month value for core CPI have hit the same value.

Given how much the Fed has talked about the 3/6/12 month variation in inflation, this is notable. /2