A cooling job market meets sticky inflation, and Wednesday’s PCE report has to referee

The US economy is presenting policymakers with the combination they least want to see: a labor market that is losing momentum alongside inflation that has stopped falling meaningfully.

Nonfarm payroll employment declined by 23,000 in July, an outright contraction rather than a slowdown in hiring. The unemployment rate stood at 4.1 percent, with the labor force participation rate slipping to 61.4 percent — a decline that flatters the headline unemployment figure by shrinking the pool of people counted as looking for work.

On the price side, the Consumer Price Index rose 3.4 percent over the 12 months ending in July, easing only slightly from 3.5 percent in June. Core CPI, which excludes food and energy, rose 2.5 percent over the year.

The gap between those two core measures and the corresponding PCE forecasts is where much of the current disagreement sits. Economists surveyed ahead of Wednesday’s release expect headline PCE inflation near 3.6 percent year over year for July and core PCE near 3.3 percent. Goldman Sachs has forecast core PCE rising 0.23 percent on the month.

For the Federal Reserve, the two halves of its mandate now point in opposite directions. A contracting payroll count is the classic argument for easing. Inflation running more than a percentage point above target, with market-based expectations drifting higher, is the argument for the tightening that several FOMC participants advocated in July.

The Bureau of Economic Analysis publishes personal income and outlays for July at 8:30 a.m. Eastern on August 26, two days before Chair Kevin Warsh’s Jackson Hole keynote.