A widening unemployment gap is typically disinflationary. While tariff passthrough may add some upward pressure on prices, the recent slowdown in job growth and rise in unemployment to 4.4% suggest labor market slack is beginning to emerge, with the jobless rate now slightly above the estimated full-employment level of 4.3% (chart above). Historically, this type of gap has been neutral to mildly disinflationary, but a further increase would likely weigh on wage growth and soften consumer demand. That, in turn, limits businesses’ ability to pass on higher costs, reducing inflation pressure and increasing the likelihood of easier Fed policy.
With long-term inflation expectations still anchored, this dynamic leaves room for rate cuts if the labor market continues to weaken.
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