Inflation peaked at 9.1% in June 2022, marking a 40-year high. Now, a year later, prices have started to cool, with inflation falling to 4.9% in April 2023. Elevated inflation is a concern for Californians as it can erode purchasing power; at the same time, businesses are facing rising costs for labor and other expenses. Since March 2022, the Federal Reserve has increased interest rates every quarter in an effort to tame inflation. While these actions may achieve price stability, they also run the risk of increasing unemployment. In this post, we take a look at how California’s labor market has responded to cooling inflation.

Inflation has been coming down for 10 months, nearing what it was two years ago. However, current inflation is still above the Federal Reserve’s 2% target. If supply-chain pressures and high-price commodities—the primary driver of this inflation spike—continue to ease, this could help further reduce inflation. But another factor that may contribute to ongoing inflation is the tight labor market, where demand for workers exceeds supply.

In California, cooling inflation has coincided with a slowdown in labor force growth, though on net the labor market still appears solid. The unemployment rate ticked up to 4.5% in April 2023, from a recent low of 3.8% in August, reflecting an additional 144,000 workers who are looking for work. However, the number and rate of unemployment today is only slightly above pre-pandemic levels and is within range of what the Congressional Budget Office predicts is needed to bring inflation down.

Employment growth has also slowed down as inflation has declined. In April 2023, California employment had risen 0.44% compared to the year prior, a little lower than the 10-year average of 1.08%. Meanwhile, the number of Californians participating in the labor market grew 32,700 in April, or at a modest 0.82% in 12 months. While low compared to prior months, more people were still entering the labor market. This is likely a sign that workers—or potential workers—are responding to job opportunities, which should help ease inflationary pressures.

Indeed, job opportunities continue to be quite strong, though they are beginning to taper off from the historic highs of the last two years. California still has more job openings, relative to the size of the labor market, than at any point since 2013 (job openings comprised 4.5% of the market in March 2023). There also continue to be more job openings than unemployed Californians, though this indicator has increased in recent months. Layoffs have ticked up slightly in March 2023, but rates are still in line with the historical 10-year average. Statewide, these indicators suggest strong but softening job opportunities. However, conditions may vary across sectors, occupations, and regions.

In the face of persistently high inflation, there is pressure to increase wages to keep up with prices. But higher wages risk further fueling inflation, in a feedback loop known as a wage-inflation spiral. Wages have increased substantially during this recent period of high inflation—the average hourly wage is up 8% since April 2021. The good news is that we do not see signs of a wage-inflation spiral at this time: wage growth has been fairly steady at 4% annual average growth since April 2021. The bad news is that, after accounting for inflation, average wages in April were 1% lower than one year ago. Though not a good sign for workers, this is an improvement from the peak inflationary period in 2022 when inflation-adjusted wages were falling much faster.

Overall, inflation is starting to cool and labor market indicators are still in positive territory—good news for California.  But since inflation is still above the long-term target, debates about when to take further action to slow the economy, and by how much, will continue. For now, leveraging strong job opportunity and wage gains is essential for building California’s workforce and shoring up the potential for economic growth going forward.