BCA Research argues that a falling U.S. unemployment rate could keep inflation above the Federal Reserve's target, even as tariff and energy effects fade. The firm says a shrinking labour force has lowered the bar for job growth to push unemployment down, and it expects structural forces to favor employers over workers.
A contraction in the U.S. labour force, driven by departing unauthorised immigrants and a falling participation rate, has lowered the threshold for job growth needed to push the unemployment rate down further, according to a note from BCA Research. Investors are now asking whether the labour market will tighten enough to keep inflation above the Fed's target even after tariff and energy effects fade over the coming year.
A conflicting Phillips Curve picture
Jonathan LaBerge of BCA Research points to a mixed history between unemployment and inflation. Both 1999-2000 and 2018-2019 saw a sub-4% unemployment rate without high inflation, while the late 1960s and the 2022-2024 period paired low unemployment with much higher inflation. The Phillips Curve describes this short-term relationship: strong demand and low unemployment tend to create inflationary pressure, while weaker demand and higher unemployment reduce it.
BCA Research believes a sub-4% unemployment rate could prove inflationary this time. The firm notes that the low-inflation, low-unemployment combination of the 1990s stemmed from productivity gains, and no such gains are yet visible in current data even though AI might lift productivity eventually. It adds that inflation expectations were far lower in 2018-2019, which likely restrained wage growth at the time.
Employers hold more structural leverage
LaBerge argues fears of a wage-growth breakout are overdone. According to BCA Research: "Our US Investment strategists see fears of a significant wage growth breakout as overdone." He says the post-pandemic wage surge stemmed from a labour supply shortfall, when record quit rates signalled poaching between firms, generous fiscal transfers slowed workers' return, and employers bidding to fill openings pushed wages higher. Those conditions, he says, no longer apply.
The firm also argues that the low cost of posting job ads online has overstated current openings, while a depressed hiring rate shows labour demand has cooled as immigration enforcement squeezes supply. BCA Research believes structural forces now favor employers, with workers holding less leverage as private-sector union membership has collapsed, making a 1970s-style wage-price spiral unlikely.
Still, the firm does not rule out a hawkish surprise from the Fed over the next 12 months, even as it plays down the chance of a self-reinforcing wage-price loop.
Source: Investing.com
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