Data for labor costs and productivity were released yesterday. Predictably, costs rose at the fastest rate in 40 years and productivity turned negative.
Unit Labor Costs (blue line) and Labor Productivity (red line)
As we know, inflation becomes "baked in" to the system as labor costs rise, with workers expecting larger pay increases to combat inflation. Essentially, it creates a self-reinforcing inflationary loop feeding on itself; it is the Fed's greatest fear - and rightly so.
To make matters worse - or better, depending on which side of the fence you are sitting - unemployment is just about the lowest in history: continued claims for unemployment insurance at 1.38 million are the lowest since 1970.
Continued Claims Lowest Since 1970
Massive government handouts and two years of pandemic restrictions resulted in a vertical rise in bank deposits, creating the fuel for very strong consumer spending - thus, even more inflation.
Demand Deposits In Banks Soared
Conclusion: The Fed has no choice but to step hard on the brakes to combat inflation. In my opinion, whoever believes in a "soft landing" may as well believe in the Tooth Fairy.