Hemphill: Understanding unemployment and inflation rates

Thomas A. Hemphill

Submitted photo

American voters — especially in battleground states — rank the “economy” as the No. 1 issue of concern in the presidential election. However, for the economically “literate” voter, it will be essential for him or her to understand such terms as “unemployment rate” and “inflation rate.” To best understand these economic terms, a savvy voter needs to understand their definitions and everyday usage.

For example, while the unemployment rate is the percentage of American adults in the labor force who are unemployed and available for work (for a specific month), it is expressed by the Bureau of Labor Statistics using different rates, the two most common being U-3 and U-6. 

The U-3 unemployment rate is the most commonly reported in the media, representing the number of unemployed people actively seeking employment. The U-6 rate includes those individuals who have become discouraged from seeking work, are presently underemployed, and those workers who are unemployed but are seeking employment. 

Many business economists and financial analysts view the U-6 rate as how the economy is performing because it covers a larger percentage of people who are unemployed but would like to be in the labor force or employed in a position commensurate with their skills and talents.

For July 2024, the BLS household survey and establishment survey of employees reported that the unemployment rate (U-3) rose by 0.2 percentage point to 4.3%. The number of unemployed people increased by 352,000, to 7.2 million. 

These measures are higher than a year earlier, when the jobless rate was 3.5%, and the number of unemployed people was 5.9 million. However, the number of people employed part-time for economic reasons rose by 346,000, to 4.6 million. Likewise, the number of people not in the labor force who want a job increased by 366,000, to 5.6 million. These individuals were not counted as unemployed because they were not actively looking for work during the four weeks preceding the survey or were unavailable to take a job. This U-6 unemployment rate for July 2024 was 8.2%, up from 7.10% for July 2023 (or a 15.49% annual increase).

The inflation rate is defined by the primary Consumer Price Index (CPI-U), a measure of inflation generated by the BLS and the most widely used measure of U.S. inflation (although there is a Producer Price Index which is calculated by the BLS and also measures inflation (or possibly deflation) from the perspective of the seller, i.e., product manufacturer or service supplier). 

This CPI-U measures changes confronted by urban consumers, who represent 93% of the U.S. population. The BLS uses a survey (the Consumer Expenditures Survey) to calculate the CPI-U for American families, which monthly measures a “fixed basket” (although items included in this “basket” are adjusted every two years) of 80,000 items that American consumers commonly purchase — from fruits and vegetables to gasoline to physicians visits.

The inflation rate (CPI-U) since January 2021 has increased 19.2% as of July 2024, which is 2.3% higher (rounding error) than wages (17%). Inflation, however, has moderated recently. In July 2024, the BLS reported that the CPI rose 2.9% from a year earlier, the lowest reading since March 2021 (and significantly lower than its June 2022 high of 9.1%). 

However, in January 2021, core inflation (CPI-U) had risen 1.4% over the previous 12 months. Thus, the inflation rate for the Biden administration in July 2024 is more than twice that in the last month of the Trump administration. 

Noteworthy, the Federal Reserve System Board of Governors attempts to slow an “overheated” economy by increasing the federal funds rate, influencing interest rates, and making borrowing money more expensive for consumers and businesses. The Federal Reserve has a target annual inflation rate of 2%, and it uses monetary policy to keep inflation in check and to stabilize the economy when inflation rises above the 2% benchmark.

A literate U.S. voter requires basic knowledge of economic terminology and how the economic data for these crucial rates compares between the Trump presidency and that of the Biden presidency.

Editor’s note: Thomas A. Hemphill is David M. French Distinguished Professor of Strategy, Innovation and Public Policy in the School of Management at the University of Michigan-Flint. Reader reactions, pro or con, are welcomed at AzOpinions@iniusa.org.