Announcement: New Payroll Inputs for Stagflation Risk Dashboard from 1 Sep 2025

Announcement: New Payroll Inputs for Stagflation Risk Dashboard from 1 Sep 2025

Let’s refresh our memory on the   current inputs of our stagflation risk model before we talk about the new Payroll input.

2s10s Yield Curve Spread

What it is: The 2s & 10s yield spread refers to the difference in yields between the 2-year and 10-year U.S. Treasury bonds. It is calculated by subtracting the yield of the 2-year bond from the yield of the 10-year bond.

Why it matters:  A yield curve inverts when long-term interest rates drop below short-term rates, indicating that investors are moving money away from short-term bonds and into long-term ones. This suggests that the market as a whole is becoming more pessimistic about the economic prospects for the near future.

Breakeven Inflation and 5y5y Forward with CPI

What it is: A simple approximation of expected inflation 5–10 years ahead using 2 × (10Y breakeven) − (5Y breakeven).

Why it matters: A measure of long-run inflation credibility. If anchored near the low-to-mid 2s, markets generally believe inflation returns to target over time. A persistent move much above ~2.5–2.7% would signal doubts about long-run inflation control.

TIPS Real Yields

What it is: The “real yield to maturity” of a TIPS (Treasury Inflation Protected Securities) is its yield above official future U.S. inflation, over the term of the TIPS.

Why it matters: Rising real yields is a signal of an inflationary direction and falling real yields is a signal of a recessionary direction.

HY OAS (High Yield Option-Adjusted Spread)

What it is: The extra yield investors require to hold sub-investment grade (“junk”) corporate bonds over comparable Treasuries, adjusted for embedded options in the bonds.

Why it matters: It’s a pulse of market stress and default risk. Higher HY OAS = tighter financial conditions and rising recession/credit risk; lower HY OAS = easier conditions and risk appetite.

CPI (Consumer Price Index)

What it is and why it matters: The CPI is of course the most visible indicator of inflation and is widely monitored by the general public and the media. But it is not the most important signal to watch for when gathering insights on the rate of change in inflation/deflation. In our model it is just one of the inputs. Also, the CPI data that we use for our model is only available once a month.  This is fine because it is not meaningful to measure consumer inflation weekly.

The new Payroll inputs

We are now including Payroll data into our model because we believe that this will increase the predictive power of the model. Here’s a quick rundown on the upcoming Payroll inputs.

What is “stagflation”?

It’s the bad combo: prices keep rising (inflation) while the economy slows or stalls (weak growth).

Why payrolls matter

Payrolls tell us how many people are getting hired, how much they’re paid, and whether layoffs are picking up. Those three signals shape both sides of stagflation:

Inflation side: if wages speed up, companies’ costs rise and they often lift prices.

Growth side: if hiring slows or layoffs rise, spending weakens and growth slows.

Three payroll “pulses” to monitor

Wage pulse (pay growth): If wage growth is hot and stays hot, it can keep inflation sticky because higher labor costs feed into prices.

If wage growth cools, it eases inflation pressure.

Why it matters for stagflation: strong wages with weak growth is classic stagflation fuel.

Hiring pulse (how many jobs are being added): Strong, steady hiring supports growth and household spending.

Slowing or below-trend hiring hints the economy is losing steam.

Why it matters: weak hiring doesn’t cause inflation by itself, but if wages are still growing fast, you get the “stagnation + inflation” mix.

Stress pulse (layoff pressure): Rising jobless claims and continuing claims are early signs that layoffs are spreading.

If layoffs rise while wage growth remains firm, companies face a squeeze: costs stay high, revenue softens. That’s a stagflation-friendly setup.

If layoffs rise and wage growth falls, inflation pressure usually eases, tilting more toward a standard slowdown or recession rather than stagflation.

How these combine into risk

Higher stagflation risk:

• ·       Wage growth running hot
• ·       Hiring slowing below normal
• ·       Jobless claims trending up

Lower stagflation risk:

• ·       Wage growth cooling toward normal
• ·       Hiring steady or improving
• ·       Jobless claims stable or falling

What to listen for in plain language

“Pay is still rising fast” + “companies aren’t hiring much” + “layoffs creeping up” = rising stagflation risk.

“Pay gains are moderating” + “hiring is okay” + “claims steady” = lower stagflation risk.

That’s why our dashboard monitors Wage pulse, Hiring pulse, and Stress pulse together: they show whether the job market is feeding inflation, weakening growth, or both at the same time.