Why Bank of America Says We Need Higher Unemployment to Stop Spiraling Costs

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Understand the relationship between unemployment and inflation with our quick explanation.


Key points

  • A recent Bank of America note said that the Federal Reserve will have to engineer job losses to get inflation under control.
  • The Fed has raised its rate by 0.75% four times in a row, which is unprecedented.
  • Prepare for job loss by updating your resume and putting money into your emergency fund.

Nine out of 10 Americans who voted in the midterms said inflation played a significant part in their decision, according to data from The Wall Street Journal. People are understandably worried about spiraling prices. Unfortunately, if the latest report from Bank of America is correct, the only way inflation can go down is if unemployment goes up. Or in other words, the state can not address cost of living problem without also causing job loss.

The relationship between inflation and the job market

According to an Insider article, Bank of America analysts think the US economy is overheating, especially in terms of the labor market. The note said Federal Reserve it will be necessary to “engineer about a 2% rise in the unemployment rate” if it is to get inflation under control.

Bank of America is not alone in arguing that unemployment is an inevitable consequence of the Fed’s actions. Olivier Blanchard, former chief economist at the International Monetary Fund told a Goldman Sachs newsletter, “I have little doubt that unemployment will increase as the Fed takes further steps to cool the economy.”

Without going deeper into economic theory, the thought about wages is that we are in a vicious circle. Unemployment is lower than the number of job openings. As a result, companies offer higher salaries so they can fill vacant positions. Existing employees also want more money because of the higher cost of living. An increase in wages means higher costs for businesses, which can result in higher prices and contribute to more inflation.

Bank of America says, “The Fed should do the dirty work of bringing the demand for labor down and in line with the supply of labor.” The problem is that the Fed does not directly affect the employment rate. One of the main tools he can use is to raise interest rates, which he has done aggressively. Interest rates only indirectly affect employment.

Increasing rates makes it more expensive for people to borrow. In theory, this lowers demand and slows the economy. If people spend less, sales will decrease, and businesses will stop hiring. If the economy slows down further, companies will have to lay people off.

Unfortunately, until now inflation remains stubbornly high. The Fed has raised rates by an unprecedented 0.75% four times in a row. Some economists answer that inflation is not budging because high wages are only part of the problem. They point out that it is other factors, such as supply chain problems and the global energy crisis, that are causing prices to rise. The difficulty is that this will not be affected by the rise in interest rates.

How to prepare for job loss

We don’t know what will happen next year. Some economists consider job losses not an inevitable consequence of an economic slowdown. It is certainly true that unemployment remains low and job openings are still relatively high. All the same, it’s worth it take steps to protect your career and your finances.

The most important thing you can do is make a plan and know how you will deal with job loss if it happens. If you’ve been thinking about changing careers, what skills do you need to make the switch? If you want to stay in your current field, what steps can you take if you are laid off? Who can you call, and what means can you use to find another position?

Here are some things you can do now:

  • Make sure your emergency fund is well stocked. If you have three to six months of living expenses separately savings account, you will be better prepared to handle any financial emergency that comes your way. If you’re especially worried, you might want to put more money into you emergency fund. That cash will give you more time to look for work if you lose your job.
  • Update your resume. If you’ve been fired, you may not be in the best frame of mind to breathe new life into your resume. Do it now instead. It’s also great to update your profile on sites like LinkedIn and reach out to your professional network.
  • Look for additional training opportunities. Learning new skills is good for your career in many ways. It can energize you in your current role and help you work more effectively. It can also show a new employer that you are willing to learn. Online or in-person courses can teach you a lot. You can also stay up to date through industry newsletters and books.

There is so much uncertainty right now, which is stressful at the best of times. Even more if spiraling costs stretch our budgets to breaking point. Try to position yourself as best you can to weather the storm and know that it won’t last forever. Economic cycles involve growth and contraction, so bear with the fact that this too will pass.

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