Mahon: Inflation uncertainty clouds otherwise stable economic picture

The U.S. economy continues to grow and labor markets remain relatively stable, but renewed inflation pressures are creating uncertainty for the economic outlook, said Joe Mahon, director of Regional Outreach at the Federal Reserve Bank of Minneapolis..Mahon is a regional economist at the Minneapolis Fed. He was a presenter at a day-long industry outreach event conducted at the Federal Reserve Bank in downtown Minneapolis on Aug. 25. Speaking about economic conditions nationally and across the Ninth Federal Reserve District, Mahon said inflation — rather than employment — is currently driving much of the economic discussion.“The labor market, I would say, [is] not exactly going gangbusters, but it’s pretty stable,” Mahon said. “The inflation question is sort of the big one that’s really driving the conversation right now.”The U.S. unemployment rate stood at 4.1 percent in July, which Mahon characterized as low by historical standards. Unemployment rates have also edged downward recently after earlier increases raised concerns about possible labor market weakening.Minnesota is an exception to a longstanding regional pattern. Its unemployment rate, at 4.3 percent, has recently exceeded the national rate, although Mahon cautioned against interpreting the change as an alarm signal. Businesses throughout the district continue to report difficulty finding enough workers, he said.Employment growth remains fairly broad based across the district, with construction and education and health services showing strength. Manufacturing, information and financial services have experienced employment declines.Inflation presents a more complicated picture.Energy prices have driven much of the recent increase, with gasoline and airline fares among the categories experiencing the largest gains. Core inflation, which excludes food and energy, has moderated to about 2.5 percent year over year, Mahon said. The Federal Open Market Committee targets 2 percent inflation over the longer term.Goods prices are another concern. Such prices historically tend to remain flat or decline, Mahon said, but have been increasing over the past year, with tariffs likely contributing to higher costs for imported products and components.Mahon said tariffs could ultimately prove to be a one-time shock to the price level, allowing goods inflation to moderate after the increases work through the economy. But uncertainty remains over trade policy and the duration of higher energy costs.Meanwhile, although the federal funds rate has remained relatively steady, Mahon noted that longer-term market rates, including mortgage rates and other private credit rates, have recently moved higher.