U.S. quit rate points to more inflation

13 September 2017

The quit rate time series produced by the Job Openings and Labor Turnover Survey (JOLTS) is a leading indicator of U.S hourly pay. As wages account for around 55% of a product’s or service’s price*, wage inflation and overall inflation rates tend to be closely related. Federal Reserve chief Janet Yellen is thought to pay close attention to the quit rate and she has referred to it in more than a few speeches.

Figures released as part of the July JOLTS report show the quit rate increased from 2.1% of the non-farm workforce at the end of June to 2.2% at the end of July. The increase was driven by quit rates in the durable goods manufacturing and health care sectors.

While the quit rate has trended up consistently since the depths of the U.S. recession in 2008/2009, the relationship with hourly pay rates has been more rubbery. Private hourly non-farm pay growth has tended to move in a “step” fashion and the 2.5% growth rate since April is an example of this. However, this situation is unlikely to remain indefinitely.

The U.S Fed has made no secret of its wish for a higher inflation rate, ideally between 2% and 3%. A higher rate of wage inflation is likely to be a substantial driver of higher inflation if not accompanied by productivity growth. With it would come a higher federal funds rate, not only because the Fed wishes to normalise interest rates, but because no central bank wants the rate of inflation overshoot and return to levels deemed to be “too high” as was the case in the 1970s. As with the three bears’ porridge, inflation rates are best if they are not too hot and not too cold.

* Barrow and Faberman, Chicago Fed Letter 2015 number 349