Inflation is probably as close to the Federal Reserve’s inflation target of 2 percent as possible this year, according to its favorite inflation index, the Personal Consumption Expenditure Price Index (PCE) that is the best overall measure of consumer price trends.
In fact, all of the inflation indicators used by economists are at or close to 2 percent for both wholesale and retail goods and services. Inflation will probably remain slightly above 2 percent annually this year because consumers’ incomes have been rising faster than the cost of things to produce.
It’s mostly in the service sector, where the rising cost of recreation, entertainment, health care and the like has been the biggest source of recent inflation. The manufacturing sector has been stalled, however, because of the high interest rates.
Service prices rose 0.4% last month, the government said Friday. The biggest increases took place in housing, health care, recreation, dining and hotels. Over the past year the cost of services has risen 4%, far too high for the Federal Reserve's comfort. Before the pandemic service inflation averaged 2.2% a year.
Why? The culprit in the Fed’s eyes is too high wages and salaries that must come down to tame inflation “sustainably”, in their words. Yet without slightly higher incomes consumers wouldn’t be able to ‘sustain’ the higher economic growth that will pay for the current wars the US is supporting, modernization of US economy, and mitigation of global warming.
Of course, there are those inflation hawks (mostly Republicans) who say we cannot afford such largesse. There’s too much debt that will overwhelm the debt markets, collapse the Dollar’s value and similar forebodings.
But they forget that such spending also boosts labor productivity and economic growth! That is why GDP growth has surged, rising 4.9% and 3.6% over the last two quarters of 2023, respectively.
And labor productivity has been surging. Nonfarm business sector labor productivity increased 3.2 percent in the fourth quarter of 2023, the U.S. Bureau of Labor Statistics reported, as output increased 3.5 percent and hours worked increased just 0.3 percent.
Productivity was shrinking, just -2.4 percent at its most recent low point in Q2 2022, meaning the number of hours worked was rising faster than output. But it increased to +2.6 percent in Q4 2023, a swing of more than 4 percent in 6 quarters.
It’s not clear if such a surge has to do with workers receiving better salaries and benefits; or the increasing use of technologies such as AI because of worker shortages across many industries.
But we do know that the $trillions in President Biden’s New, New Deal are being spent on developing new technologies, such as the CHIPs Act that is financing new factories in several states.
We had even more debt as a percentage of GDP during WWII. We couldn’t have won World War Two without it. And we also know the new technologies it financed created the American middle class and gave us the boom years after World War Two.
Harlan Green © 2024
Harlan Green on Twitter: https://twitter.com/HarlanGreen
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