SAN FRANCISCO (Reuters) – A tight U.S. labor market is still adding to inflationary pressures, though less so than it did in 2022 and 2023, according to research published on Monday by the San Francisco Federal Reserve.

“Declines in excess demand pushed inflation down almost three-quarters of a percentage point over the past two years,” San Francisco Fed economists Regis (NASDAQ:) Barnichon and Adam Hale Shapiro wrote in the regional Fed bank’s latest Economic Letter. “However, elevated demand continued to contribute 0.3 to 0.4 percentage point to inflation as of September 2024.” 

The finding, based on an analysis of the relationship between inflation and labor market heat as measured by the ratio of job openings to job seekers, could help inform Fed policymakers as they weigh how much further and at what pace to reduce short-term borrowing costs. 

The U.S. central bank began lowering its policy rate in September in response to a slowdown in inflation and cooling of the job market. After a second rate cut earlier this month, the rate now sits in the 4.50%-4.75% range. U.S. central bankers believe that level is high enough to keep the brakes on the economy, but there is broad internal disagreement over how restrictive the rate is, and therefore about when and how much to cut it further.

Fed Chair Jerome Powell, who has followed the sharp decline in the job-openings to job-seeker ratio closely, has said he believes labor demand is now in rough balance with supply and that the job market is no longer a source of significant inflationary pressures. 

The San Francisco Fed research suggests the job market continues to be a source of inflation, which Powell estimates was 2.3% in October by the Fed’s targeted measure, and 2.8% by a measure stripping out food and energy that the Fed uses to gauge underlying inflationary pressures. 

The U.S. central bank aims for 2% inflation.