What is fueling inflation and how is it impacting Utah’s economy and job market?

Estimated read time: 4-5 minutes

SALT LAKE CITY — Utah’s employment summary for the month of June further reinforces the notion that the Beehive State’s economy is faring better than the national economy.

“Currently, the economic numbers are still strong here in Utah,” Mark Knold, Utah Department of Workforce Services’ chief economist, said Friday.

The state’s nonfarm payroll employment for June increased an estimated 3.5% across the past 12 months, with the state’s economy adding a cumulative 56,300 jobs since last June, bringing Utah’s current job count to 1,666,300, according to the Utah Department of Workforce Services’ June 2022 Employment Summary.

Additionally, the unemployment rate is “historically low,” at just 2%, well below the national average of 3.6%, the summary said.

“History has shown that when the economy runs at such a vibrant pace, it does not stay there for a lengthy amount of time. Something exogenous usually arises to temper such a furious pace,” Knold said. “The economic omens of such a change may be before us.”

The main omen is economic inflation, he said.

“When prices increase noticeably before consumer’s eyes, this negatively impacts both their economic psychology and enthusiasm,” Knold said.

Due to the negative influence inflation carries, Knold pointed out that those guiding the government’s actions in regard to the economy can tend to take an aggressive stance over inflation with the intention of returning inflation to a more passive economic position.

“The board of governors of the Federal Reserve System, or the Fed, are the influential overlords of the nation’s economy,” Knold said.

When inflation runs high like it is now, the Fed’s tendency is to raise interest rates with the goal of lowering inflation.

This process, though, can slow or impede the U.S. economy, Knold said.

“All expect the Fed to move aggressively to raise interest rates with the goal to bring that inflation back down, even if it means stunting the overall U.S. economic pulse in the short run,” he said.

What factors drive inflation?

So what is driving inflation?

Knold said it’s multiple factors, some that the Fed has influence over and some that it does not.

“Product supply chain disruptions have limited the flow of goods from other countries, like China, contributing to increased product prices and thus fueling inflation,” Knold said. “The Fed does not have the power to reopen supply chains.”

He added that Russia’s invasion of Ukraine, which has sent gas prices skyrocketing, isn’t something the Fed has control over.

“Conversely, a domestic economy where worker wages are rising rapidly, producing increasing prices that contribute to inflation is something that is under the Fed’s sphere of management,” Knold said.

He noted that while the Fed doesn’t have the absolute power to alter inflation, it does have the power to cause consumers to alter their spending habits.

“If you cannot increase the supply of goods, your other option for maintaining price stability is to reduce the internal demand for goods,” Knold said. “That is what many are expecting from the Fed moving forward and many are anticipating a U.S. recession in 2023 because of this.”

Utah’s economic health and the labor market

If a recession does come, Knold said that the current health of Utah’s economy — which is at the “most favorable level it can be” — will work in the state’s favor.

“There is a lot of room for economic slowing before such weakening moves into levels that become painful and injurious upon the economy,” Knold said.

He also noted that Utah’s housing market could use a bit of time to invigorate the supply while the demand is pulled back a bit.

“The current hyper-tight labor market may be of such a unique composition that what we’d normally expect from recessions — like noticeable amounts of job loss and high unemployment — may not be the outcomes we will see if a recession were to arise within the next year,” Knold said.

Knold said that it “seems highly likely” that a national recession will be coming within the next year. What is less clear, he said, is how that recession will affect both the U.S. and Utah economies.

This is in part due to the fact that there has never been a time when the U.S. has faced so many workers exiting the labor force without an equal (let alone excess) force aging in.

“Future recessions may not have as much setback and disruption upon the labor markets as they have had in the past,” Knold said. “Defining new levels of recessionary expectations may be part of both Utah’s and the United States’ economic stories going forward.”

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