Wage Effect

The implication is that large numbers of long-term unemployed don’t exert much downward pressure on wages. What counts, according to Neil Dutta of Renaissance Macro Research in New York, is how many people are looking for work after having been jobless for only a few weeks or months. When their numbers dwindle, employers may have to offer higher wages to fill vacancies.

Investors are starting to pay attention. More than $350 million flowed into inflation-protected bond funds in the week ended March 5, the most since May 2012, according to data from Cambridge, Massachusetts-based EPFR Global. The increase followed eight straight weekly declines.

“The overall cultural attitude among investors” may be shifting from deflation worries to concerns “about the likelihood of emerging inflationary pressures,” James Paulsen, the Minneapolis-based chief investment strategist at Wells Capital Management Inc., wrote in a March 11 note to clients.

Yellen, 67, told the Senate Banking Committee on Feb. 27 that the Fed is moving in the direction of providing investors with qualitative guidance on its interest-rate intentions now that unemployment is closing in on the central bank’s 6.5 percent marker.

Part-Time Workers

The Fed chair suggested that the jobless rate, if anything, may understate how loose the labor market is. She pointed to the large number of people working part-time who would prefer more hours. Some 7.2 million Americans faced that predicament in February, well above the 20-year average of 5.3 million, according to seasonally adjusted Labor Department data.

In a speech last year, Yellen pointed to a number of other indicators of labor market slack, including the share of the working-age population in the labor force and the hiring rate by employers.

While Yellen hasn’t drawn attention to short-term joblessness as a key indicator, some of her Fed colleagues have. John Williams, president of the Federal Reserve Bank of San Francisco, said on Feb. 19 that the drop in short-term unemployment may cause inflation to pick up more quickly than the gradual increase he currently envisions.

Inflation Risk