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Chart of the week

Negative productivity complicates the Fed’s path

Though CPI moderated in July, this week’s chart looks at negative productivity trends that could exaggerate wage pressures and complicate the Fed’s job.

August 12, 2022 | 2 minute read

Nonfarm labor productivity

Source: Bloomberg Finance, L.P., and U.S. Labor Department. As of August 11, 2022. 

  • Investors welcomed a rare bit of positive inflation news on Wednesday. In just its second downside surprise in the past 15 months, headline and core consumer price index (CPI) data both softened in July. Equity and fixed income markets rallied together as investor expectations for another 75-basis point Fed rate hike in September dropped sharply.
  • For all the relief the report provided investors, the Labor Department’s productivity report released just one day earlier shined a spotlight on the challenges the Fed continues to face in battling today’s broad-based and sticky inflationary pressures.
  • The report showed that U.S. labor productivity remains deeply negative. As the chart highlights, worker productivity has been negative in three of the past four quarters.1 At -2.5% through Q2 2022, it saw its steepest annual decline since the Labor Department began tracking it in 1948.1
  • Labor productivity is important as it allows firms to raise wages without commensurate increases to prices. Against this backdrop, rising wage growth remained a concern in July’s CPI report; goods prices showed signs of moderation but remain far above the Fed’s comfort level.
  • Said another way, both sets of data released this week amplify that the Fed’s battle against inflation could last for many more quarters as stickier contributions to CPI remain high (wages, shelter and food costs, among others). Despite the market rally, traditional investments could continue to be volatile as the monetary policy, interest rate and inflation outlooks all remain highly volatile. 

  • Bloomberg Finance, L.P., and U.S. Labor Department. As of August 11, 2022.

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