Tuesday, December 18, 2018

What Happened to Inflation?

Popular Economics Weekly

It looks like inflation will no longer be a problem holding back consumer spending for the forseeable future; or in any other economy in the developed world as well.

It’s not a problem because economies today can quickly ramp up production and sell into multiple international markets due to the new technologies and labor-saving devices that keep popping up. It’s why the Consumer Price Index (CPI) is increasing just 2.2 percent annually, when energy and food price fluctuations are taken out.

This is both good and bad for a number of reasons. Firstly, it means interest rates won’t rise very fast, lowering borrowing costs for consumers and businesses, the boost to consumers.

The increased use of robotics in the service and manufacturing sectors is just one example that makes this possible. Labor productivity has surged. The U.S. Bureau of Labor Statistics just reported nonfarm business sector labor productivity increased 2.3 percent during the third quarter of 2018, I reported last week, as output increased 4.1 percent and hours worked increased just 1.8 percent. Declining unit labor costs over the past 12 months are the reason productivity has increased at the same time as output.

That means labor costs aren’t rising either, which boosts labor productivity, and higher productivity boosts everyone’s standard of living. The average labor productivity rate of 2 percent since World War II has doubled the standard of living every 25 years for workers.

It means personal incomes are rising faster than inflation, at the moment, which boosts consumer buying power. But the prolonged low inflation since the end of the Great Recession also means aggregate demand (the overall demand by consumers, investors and government for ‘things’) has not been strong enough to boost GDP grown above 2 percent.

But we could also be returning to a period of disinflation—falling inflation—or outright deflation that lasted for two decades in Japan, and that Federal Reserve officials worried about in the past—hence Ben Bernanke’s ‘Helicopter Ben’ moniker when he said in early 2000s somewhat facetiously that dropping money from helicopters is one way to combat deflation.

Should we worry about continued low inflation that worried the Fed for so long and resulted in the QE security purchases that have kept interest rate at rock bottom for so long? Yes, because wages and salaries are not rising as fast as they should to boost aggregate demand and therefore maintain economic growth in the longer term 3 percent average range. This due to a number of reasons, including labor-unfriendly administrations that took away labor protections.

And that’s why there isn’t the money for badly needed infrastructure, healthcare, education, and just about everything in the public sector that only governments can do. Slow growth also means many lack a decent living wage, or standard of living.

Harlan Green © 2018

 Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

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