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Inflation is all about energy prices - Jobs are not nearly as concerning

Please see Bill's chart book for a helpful walk down inflation lane.

TCV Economist Bill Knudson makes the inflation forecast call! Over the past 2 months, gas prices have been increasing and this will impact the March CPI data due out in April.  Bill estimates the monthly CPI for March will be ~ 0.6% and this will cause the Annual CPI for March to rise from 3.2% to 3.7%. This inflation level is more likely to persist through 2024.

The good news is, it could be worse....

Photo Credit: PubAffairs Bruxelles

New Jobs or Energy Prices Causing Inflation April 2024


Inflation and Mortgage Rates 1971 - Present


New Jobs: April 2021- Present


New Jobs Impact on Unemployment Rate


New Jobs Impact on Inflation


New Jobs & Inflation + Mortgage Rates


Fed Balance Sheet and Runoff


Inflation and Energy/Gas Prices April 2021 - Present


Inflation Components Changes Jan 2019 - Present


Inflation Components Weighted Jan 2019 - Present


World Oil Reserves




Largest Oil Producers and Consumers

1. It is well established that Inflation is a major leading cause of higher mortgage rates. When inflation rises, the Fed increases the Fed Fund Rate to combat inflation. By increasing the Fed Fund Rates, causes mortgage rates to rise.

Inflation occurs first and mortgage rates follow. Then what causes inflation?


2. A prevailing belief is New Jobs create inflation. The rationale is more jobs put more money into the economy and this sets off increased demand for a fixed supply of goods at that moment in time. Below are the new jobs over the past 3 years. In March 2024 new jobs came in at 303,000. While this was a relatively high amount, it was not an outlier compared to prior months.

Is there an upward trend of new jobs? When viewed over the past 6 months, yes but viewed over 36 months a different story emerges.


3. Does New Jobs lead to a lower unemployment rate? Yes, it does but what is worth noting is not every spike in monthly New Jobs leads to a decrease in the unemployment rate. This implies additional people are entering the labor force (i.e. participation rate). Total employment is 154 MILION while monthly New Jobs is in THOUSANDS.

A lot of new monthly jobs need to be created to make a change in total employment.

Similarly, it takes years of earnings to make a material change in one’s net worth.


4. Do New Jobs lead to higher inflation? The black line below is inflation. If there is a relationship between the two, then spikes in the bars should cause the black line to move up. There does not appear to be a cause and effect---at least not immediately.


5. What is going on with mortgage rates? Mortgage rates are much more influenced by inflation than by New Jobs. Inflation increased, Fed reacted by raising the Fed Funds rate and this in turn caused mortgage rates to increase. There is a lag between inflation rising/falling and mortgage rates.

It is highly suspected that mortgage rates have remained at an elevated level as the Fed lets its portfolio of US Treasuries and MBS investments mature and the Fed reinvests the proceeds at an amount that is lower than the maturing amount. This allows the Fed to attain its goal of decreasing its balance sheet which swelled in response to the COVID crises.


6. Fed portfolio expansion through COVID (QE program) is shown on the graphic on the left and the subsequent effort to reduce its portfolio after the abatement of the COVID crisis.


7. So if New Jobs are not THE major cause, what is? Answer: gas and energy (see red line). There is a HIGH correlation between the two as shown below. There are other factors that caused Inflation to spike in June 2022 (new & used car prices, food, post-COVID demand surge) but energy costs are the key cause.


8. Inflation is the sum of 6 components. Some have spikes while others are relatively flat. It is fair to say that leading up to the Inflation’s peak in June 2022 was caused by a combination of factors during the 12 months leading up to then, but one category that stands out is Energy/Oil (solid blue line)


9. The six inflation components have different weights. For example, shelter is 32% and energy/gas is 9%. The good news about shelter is it is slow to change and its changes are spread over a longer time frame (see black bars segments below) while energy/gas can move quickly and by a large amount (see red bars). With the components weighted, clearly the red bar for energy/gas was THE leading cause of inflation leading up to the 9.1% peak in June 2022.


10. In conclusion, while New Jobs can impact inflation over a longer time period, the leading cause of inflation that we are dealing with is caused by energy/gas prices. It is a supply-side issue, not a demand-side.

As energy/gas prices go, so goes inflation. While not a perfect, one-to-one relationship, there is a strong correlation between the two. Below are the countries with the World’s largest reserves.


11. Below is OPEC+ which accounts for 38% of the world’s production in 2022 OPEC+ was created in 2016 as the US became the World’s largest oil producer due to shale oil production increases.


12. Largest PRODUCERS on the left in green, largest CONSUMERS on the right in red:


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