Thursday, 15 of November of 2018

Economics. Explained.  

Category » NumberNomics Notes

2019 Economic Outlook Conference

2019 Economic Outlook Conference

In times of uncertainty whether you are running a business or planning your investments, knowledge can be your most valuable asset. 


Stephen Slifer, Owner and Chief Economist at NumberNomics will provide insight regarding what to expect in 2019.


Growth can’t continue at this pace.  Or can it?

When will higher interest rates spoil the party?

Inflation is low for one very important reason.  What is that?

What are the two best leading indicators of recession?

All expansions end.  Is the end for this one in sight? 


DATE:     Thursday, December 6, 2018

TIME:      7:30 to 9:00 A.M.

PLACE:   Daniel Island Club, 600 Island Park Drive, Charleston, SC 29492

COST:      $40.00 includes breakfast


Stephen Slifer:  From 1980 until his retirement in 2003, Mr. Slifer was the Chief U.S. Economist for Lehman Brothers in New York City.  In that role he directed the firm’s U.S. economics group and was responsible for the firm’s forecasts and analysis of the U.S. economy.

Prior to that, he spent a decade as a senior economist at the Board of Governors of the Federal Reserve in Washington, D.C.  He has written two books about the various economic indicators and how they can be used to forecast economic activity.  He writes a regular bi-weekly economics column for the Charleston Regional Business Journal.


Proudly sponsored by:

Charleston Digital Corridor                              Charleston Regional Business Journal

Daniel Island Business Association                 Daniel Island Town Association

NumberNomics                                                Cetera Advisors

Baird                                                                Trident Technical College

Wells Fargo Advisors


To Register: Read more »

Small Business Optimism

November 13, 2018

Small business optimism fell 0.5 point in October to 107.4 after having declined 0.9 point in September.  The August level of 108.8  broke the previous record high level of 108.0 set 35 years ago back in July 1983.

NFIB President Juanita Duggan said,  “For two years, small business owners have expressed record levels of optimism and are proving to be a driving force in this rapidly growing economy.  The October optimism index further validates that when small businesses get tax relief and are freed from regulatory shackles, they thrive and the whole economy prospers.”

NFIB Chief Economist added that, “An unburdened small business sector is truly great for employment and the general economy.  October’s report sets the stage for solid economic and employment growth in the fourth quarter, while inflation and interest rates remain historically tame. Small businesses are moving the economy forward.”

In our opinion the economy is expected to expand at a rapid clip in coming months in response to a number of significant policy changes.  Specifically, we believe that the cut in the corporate income tax rate, legislation that will allow firms to repatriate corporate earnings currently locked overseas back to the U.S. at a favorable 15.5% rate, and the steady elimination of unnecessary, confusing and overlapping federal regulations will boost investment.  That, in turn, should boost our economic speed limit should from 1.8% or so today to 2.8% within a few years.

The stock market has retreated from its recent record high level.   However, jobs are being created at a brisk pace.  The unemployment rate is well below the full employment threshold.  The housing sector is continuing to climb slowly.  And now investment spending has picked up after essentially no growth in the past three years.  We expect GDP growth to climb from 2.5% in 2017 to 3.0% in 2018 and 2.9% in 2019 .  The core inflation will  climb from 1.8% in 2017 to 2.2% in 2018 and 2.4% in 2019.  The Fed will continue to raise short-term interest rates very slowly.  Accelerating GDP growth, low inflation, and low interest rates should propel the stock market to new record high levels in the months ahead.

Stephen Slifer


Charleston, SC

The Oil Price Roller Coaster Is Not Over

November 9, 2018

Up and down and …up again?    The stock market captured everybody’s attention in October as fears emerged that the U.S. economy might be overheating along with worries about the pace of rate hikes by the Fed, the election, and trade.  But the oil market has been on an even wilder ride.  In mid-August oil prices dipped to $65 per barrel.  By early October they soared 17% to $76.  Since that time, they have fallen steadily to $59.50 —  a drop of 22% in a single month.  What in the world is going on and, more importantly, what’s next?

In late August and September, the run- up in crude prices appears to have been driven by robust 4.2% U.S. GDP growth in the second quarter, accelerating wage pressures, a fear of higher inflation, and the possibility of faster and/or additional Fed  tightening than had been anticipated.  Those same fears precipitated a 10% correction in the stock market as investors worried that the Fed’s rate hikes might short-circuit the nearly 10-year old expansion.

As oil prices rose, oil-producing countries turned on the spigot.  OPEC countries, Saudi Arabia in particular, significantly increased production.  U.S. shale oil drillers boosted output even more dramatically.  U.S. production jumped 6.5% within a matter of weeks.

At the same time,  global economic activity ratcheted downward.  When Trump began imposing tariffs in February global investors quickly concluded that the U.S. was in a far better position to withstand a trade war than any other country around the globe.  Foreign investment money flooded into the U.S. stock and bond markets. The dollar increased by 10%.  The U.S. economy was on a roll.  But the higher dollar negatively impacted emerging economies.  Because they must pay for their imported raw materials in dollars, their cost of goods sold quickly jumped 10%.  Currencies for emerging economies fell sharply.  Their stock markets declined more than 20%,  It became clear that GDP growth in emerging economies – China in particular – was going to slow.  Indeed, in mid-October the IMF lowered its GDP forecast for emerging nations in 2019 by 0.3%.

With reduced demand and surging supply, oil prices collapsed. They fell 22% from a high of $76.50 in early October to $59.50 within a month.

What is astounding about this process is the speed with which oil-producing countries can step on the gas when they choose to.  That is certainly true for OPEC.   Technological developments in the past seven years like fracking and horizontal drilling have not only made the U.S. a player in the global oil market, the U.S. became the world’s largest producer of crude oil in March of this year, surpassing previous industry giants Russia and Saudi Arabia.  Furthermore, the Energy Department anticipates an additional 10% increase in U.S. oil output in 2019 which will further widen the production gap between the U.S. and the rest of the world.  Production can adjust up or down by huge amounts in a hurry.

The political implications of this development are enormous.  While OPEC countries will continue to have a significant influence on oil prices around the globe, they no longer will have the ability to cripple the global economy by sharply curtailing supply and lifting oil prices to $100 per barrel or beyond.  The speed with which U.S. producers can adjust output has eliminated that outcome.

While inflation fears in the U.S. are on the upswing it is quite clear that in the near-term those price pressures will be alleviated by falling oil prices.

This may not be the end of the story.  U.S-imposed oil sanctions on Iran went into effect on November 5.  Iranian production has held steady in recent months at about 3.8 million barrels per day but with a hint of emerging weakness in September.  Trump’s goal is to eliminate Iranian oil exports from the world marketplace.  It is not clear the extent to which that will happen.  Saudi Arabia has pledged to counter any Iranian shortfall, but much of its surplus capacity has been idle for a long period of time and may, or may not, be easily brought on line.

In our opinion, oil prices may well be approaching a near-term low point for several reasons.  First, OPEC countries have already begun to talk about cutting production.  Given the precipitous drop in prices U.S. producers could do the same thing.  Second, Iranian oil exports could fall sharply.   Third, global demand could be stronger than anticipated.  The oil market has been on a roller coaster for the past six weeks, and it is not at all clear that the ride is over.

Stephen D. Slifer


Charleston, S.C.

Consumer Sentiment

November 9, 2018

The preliminary reading for consumer sentiment for November was 98.3 versus a final reading of 98.6 in October.  The November level was 3.1 points lower than March’s level of 101.4 was the highest level of sentiment since January 2004.  Thus, sentiment remains at a very lofty level.

Richard Curtin, the chief economist for the Surveys of Consumers, said, “Consumer sentiment remained virtually unchanged in early November from its October reading. Importantly, interviewing went through Wednesday night so there was a one-day overlap after the mid-term election results were known by consumers. Those few cases held expectations that were identical with the data collected earlier in the month, which is not so surprising given that the split between the House and Senate was widely anticipated.”

Given the tax cuts we expect GDP growth to climb from 2.5% in 2017 to 3.0% in 2018 and 2.9% in 2019.  We expect the economic speed limit to be raised from 1.8% to 2.8% within a few years.  That will accelerate growth in our standard of living.  We expect worker compensation to increase 3.5% in 2018 vs. 1.8% last year. The core inflation rate (excluding the volatile food and energy components) rose 1.8% in 2017 but should climb by 2.2% in 2018 and 2.4% in 2019.  Such a scenario would keep the Fed on track for the very gradual increases in interest rates that it has noted previously.  Specifically, we expect the funds rate to be 2.2% by the end of 2018 and 3.2% by the end of next year.

The modest September decline was attributable to both the expectations and current conditions components.

Consumer expectations for six months fell from 89.3 to 88.7.

Consumers’ assessment of current conditions edged upwards from 113.1 to 113.2.

Trends in the Conference Board measure of consumer confidence and the University of Michigan series on sentiment move in tandem, but there are often month-to-month fluctuations.  Both series remain at levels that are consistent with steady growth in consumer spending at a reasonable clip of about 2.5% in 2018.

Stephen Slifer


Charleston, SC

Producer Price Index

November 9, 2018

The Producer Price Index for final demand – intermediate demand  includes producer prices for goods, as well as prices for construction, services, government purchases, and exports and covers over 75% of domestic production.

Producer prices for final demand rose 0.6% in October after having risen 0.2% in September and having declined 0.1% in August.  During the past year this inflation measure (the red line) has risen 2.8%.  The PPI has been moving steadily higher for some time but its rate of ascent appears to have slowed.

Excluding food and energy producer final demand prices climbed by 0.5% in October after having risen 0.2% in September and having declined 0.1% in August.  They have risen 2.5% since October of last year (the pink line).  This series has been steadily accelerating for the past two years.  Inflationary pressures are gradually re-surfacing.

This overall index can be split apart between goods prices and prices for services.

The PPI for final demand of goods  jumped 0.6% in October after having declined 0.1% in September. These prices have now risen 3.6% in the past year (left scale).  But the October jump was entirely related to the volatile food and energy categories.  Excluding the volatile food and energy categories the PPI for goods was unchanged in October after having risen 0.2% in September.  During the past year the core PPI for goods (the light green line) has risen 2.4% (right scale).

Food prices jumped 1.0% in October after having fallen 0.6% in both August and September.  Food prices are always volatile.  They can fall sharply for a few months, but then reverse direction quickly.  Over the past year food prices have declined 0.8%.

Energy prices jumped 2.7% in October after having declined 0.8% in September.  Energy prices have risen 12.6% in the past year.  But given what has been happening to oil prices lately and their slide below $60 per barrel, it is clear that energy prices will fall sharply in November.  This recent drop is in large part because U.S. oil output is now surging and OPEC has increased its crude oil output.

The PPI for final demand of services jumped 0.7% in October after having risen 0.3% in September after having declined 0.1% in both July and August.  This series has risen 2.5% over the course of the past year (left scale).   The jump in service goods prices in both September and October were caused by a run-up in the trade services category.  These swings largely reflect the change in margins received by wholesalers and retailers (apparel, jewelry, and footwear in particular). .  The PPI for final demand of services excluding trade and transportation (the light blue line) increased 0.2% in October after having risen 0.3% in June, July and August, and September.  It has climbed 2.6% during the past year.  This series, like the overall index, has been gradually accelerating for some time.

The recent increases in producer prices were foreshadowed by the results of the Institute for Supply Management’s series on prices paid by manufacturing firms.  In the case of manufacturing firms the chart looks like the one below.  Price pressure were steadily building for six consecutive months.  Specifically, the price component rose steadily from 64.8 in November of last year to 79.5 in May.  The fact that every month was above 50.0 meant that prices producers were paying increased every single month.  Given that the level of the index steadily rose during that period of time indicates that price pressures were intensifying every single month.  However, from June through October this series has actually declined to 71.6  This means that prices continued to climb in those months, but the rate of increase was less than in other recent months.  Hopefully, this means that the steady upward pressure on the PPI is beginning to abate.

Because the PPI measures the cost of materials for manufacturers, it is frequently believed to be a leading indicator of what might happen to consumer prices at a somewhat later date.   However, that connection is very loose.

It is important to remember that labor costs represent about two-thirds of the price of a product while materials account for the remaining one-third.  So, a far more important variable in determining what happens to the CPI is labor costs.  With the unemployment rate currently at 3.7% the labor market is beyond full employment.  As a result, wages pressures have begun to climb, but much of the upward pressure on inflation should be countered by an increase in productivity.  Nevertheless, the tighter labor market should exert at least moderate upward pressure on the inflation rate.

Some upward pressure on labor costs, rents, and the cost of materials will put upward pressure on inflation.  We expect the core CPI to increase 2.2% in 2018 and 2.4% in 2019 after having risen 1.8% in 2017.

Stephen Slifer


Charleston, SC

Initial Unemployment Claims

November 8, 2018

Initial unemployment claims continue to fall to multi-decade lows.  Specifically, claims fell 1 thousand in the week ending November 3 to 214 thousand after  having declined 1 thousand in the previous week.  The 4-week moving average was unchanged at 214 thousand.  The lowest level for this series in the cycle was set back in mid-September at 206 thousand.  It obviously remains close to that level.  That, in turn, was the lowest level since December 6, 1969 when it was 205 thousand.

As one might expect there is a fairly close inverse relationship between initial unemployment claims and payroll employment.  With initial claims (the red line on the chart below, using the inverted scale on the right) at 214 thousand  we would expect monthly  payroll employment gains to exceed 300 thousand.  However, employers today are having difficulty finding qualified workers.  As a result, job gains are significantly smaller than this long-term relationship suggests and are currently about 190 thousand.

With the economy essentially at full employment, employers will have steadily increasing difficulty getting the number of workers that they need.  As a result, they might choose to offer some of their part time workers full time positions.  But this series is exactly where it was going into the recession so they will have limited success in finding necessary workers from this source.

They will also have to think about hiring  some of our youth (ages 16-24 years) .  But the September level for the youth unemployment rate today was the lowest on record (for a series that goes back to 1970) so there are not many younger workers available for hire.

Finally, employers may also consider some workers who have been unemployed for an extended period of time.  But these workers do not seem to have the skills necessary for today’s work place.  Employers may have to offer some on-the-job training programs for  those whose skills may have gotten a bit rusty.  But even if they do, the reality is that the number of discouraged workers today is quite low — it is essentially where it was going into the recession.

The number of people receiving unemployment benefits declined 8 thousand in the week ending October 27 to 1,623 thousand.  The 4-week moving average declined 8 thousand to 1,633 thousand.  This was the lowest 4-week average since August 11, 1973 when it was 1,627 thousand.  The only way the unemployment rate can decline is if actual GDP growth exceeds potential.  Right now the economy is climbing by about 2.8%; potential growth has probably picked up from 1.8% previously to perhaps 2.3% today given faster growth in productivity.  Thus, going forward  the unemployment rate should continue to decline slowly.

Stephen Slifer


Charleston, SC

Gasoline Prices

November 7, 2018

Gasoline prices at the retail level fell $0.06 in the week ending November 5 to $2.75 per gallon.  In South Carolina gasoline prices tend to about $0.25 below the national average or about $2.50. The Department of Energy expects national gasoline prices to average $2.75 this year.  

Spot prices for gasoline have fallen sharply in the past couple of weeks primarily because of the decline in crude prices.  If gasoline prices remain at their current level, pump prices will continue to slide.

The selloff in the stock market in October pushed oil prices back down to $67 per barrel with an expectation that higher short- and long-term interest rates will slow the pace of economic activity and, hence, push oil prices lower.  And now, in the past two weeks,  oil production around the globe has surged and reduced prices further to $62 per barrel.

For example,  U.S. production has surged to 11,600 thousand barrels per day.  Saudi Arabia has also increased its production.

Keep in mind that the Department of Energy expects production to average 10.9 million barrels this year but climb further to 12.1 million barrels in 2019.  This means that the U.S. became the world’s largest oil producer in March of this year and is expected to boost production by almost 10% in 2019 to further widen the gap between U.S. production, Russia, and Saudi Arabia.

There is so much oil currently flooding the market that oil inventories are rising rapidly.    However, at 1,086 million barrels crude inventories are still lower the 5-year average of 1,116 million barrels so one can hardly characterize this as an oil glut.  It is, however, a sign that currently supply is exceeding demand by a fairly significant amount.

The wild cards right now are production levels for Venezuela and Iran.  Venezuela’s oil output has been falling steadily for the past couple of years and is showing no sign of recovering.  Iran is different.  The Iran sanctions are going into effect right now.  Iranian production has not fallen too sharply yet, but the U.S. goal is to reduce exports (and, hence, production) close to zero.  Thus, as we go forward Iranian output could fall sharply and counter much of the recent oversupply.  OPEC claims it has ample reserves to offset any Iranian shortfall, but that surplus equipment is old and has not been used in some time so we will see.

Stephen Slifer


Charleston, SC*

Unemployment vs. Job Openings

November 6, 2018

The  Labor Department reported that job openings declined 3.9% in September to 7,009 thousand, but that follows an increase of 3.1% in August and 3.7% in July.   It is worth noting that there are far more job openings today than there were prior to the recession (4,123 thousand in December 2007).   There were 6.0 million people unemployed in September.

As shown in the chart below, there are currently 0.8 unemployed workers for every available job.   Think of that — there are more job openings today than there are unemployed workers.  Prior to the recession this ratio stood at 1.7 so the labor market is clearly in far better shape now than it was prior to the recession.  Further, at the end of the recession there were 6.6 times as many unemployed workers as there were job offers so, clearly, the job market has come a long ways in the past 9-1/2 years.

In  this same report the Labor Department indicated that the quit rate in September was  at 2.4 which is the highest level since January 2001.   This is a measure of the number of people that voluntarily quit their jobs in that  month.  During the height of the recession very few people were voluntarily quitting because jobs were scarce.  So the more this series rises, the more comfortable workers are in leaving their current job to seek another one.  The quit rate today is 2.4.  At the beginning of the recession it was at 2.0 and the record high level for this series was 2.6 back in January 2001.

There is one other point that should be made about this report.  Janet Yellen used to  claim that there were a large number of unemployed workers just waiting for jobs if only the economy were to grow fast enough.  She is assuming that these people have the skills and are qualified for employment.  We tend to disagree.  There are plenty of job openings out there.  What is not happening as quickly is hiring.  Take a look at the chart below.  Job openings (the green line) have been rising rapidly (and are far higher now than they were prior to the recession); hires (the red line) have been rising less rapidly.

Indeed, if one looks at the ratio of openings to hires the reality is that this ratio  has not been higher at any point in time since this series began in 2000.  There are plenty of jobs out there, but employers are having a hard time filling them.  Why is that?

A couple of thoughts come to mind.  First and foremost, many unemployed workers simply do not have the skills required for the jobs available.  If they did, why aren’t they being hired?  Why aren’t some current part time workers stepping into the void for those full time positions? Why haven’t discouraged workers begun to seek employment with so many jobs available?  Why haven’t long-term unemployed workers bothered to go back to school and acquire the skills that are necessary to land a  job?

Or perhaps many of these people flunk the drug tests.  They might not be qualified for employment for a variety of possible reasons.

Perhaps also some people in this group find the combination of unemployment benefits and/or welfare benefits sufficiently attractive that there is little incentive to take a full time job when you can sit at home do nothing and make almost as much.

Whatever the case, it appears that the decline in the unemployment rate in the past couple of years is not simply a reflection of workers dropping out of the labor force.  Jobs are plentiful and the only reason the unemployment rate is not falling faster is because the remaining unemployed/discouraged/part time workers do not have the skills required by employers today, flunk the drug tests, or are unwilling to take the jobs that are available.

Stephen Slifer


Charleston, SC

Purchasing Managers Index — Nonmanufacturing

November 5, 2018

The Institute for Supply Management not only publishes an index of manufacturing activity each month, they publish two days later a survey of non-manufacturing firms — which largely consists of services. The business activity index decline 2.7 points in October to 62.5 after having jumped 4.5 points in September and 4.2 points in August.   While this index declined slightly in October, it fell from the highest level for this index since January 2004.  In October, 17 of 18 service-sector  industries  reported expansion.  Good, solid, broad-based growth continues at a relatively high level.  At its October level the non-manufacturing index equates to GDP growth of 4.1%.

The orders component fell 0.1 point in October to 61.5 after having risen 1.2 points in September.  Orders continued to flow in at a solid pace in September.  February (at 64.8) was the strongest month for orders since August 2005.

The ISM non-manufacturing index for employment declined 2.7 points in October to 59.7 after having surged upwards by 5.7 points in September.   The September level of 62.4 was the highest level thus far in the business cycle.  Jobs growth should continue in upcoming months at about the same pace we  have seen of roughly 190 thousand per month.

Finally,  the price component declined 2.7 points in October to 61.7 after having risen 1.4 points in September.   That is the thirteenth  consecutive monthly level above 60.0.  It is clear that non-manufacturing firms are encountering higher prices for their materials.  That will continue to put some upward pressure on the inflation rate.

Stephen Slifer


Charleston, SC

Looking at the Wrong Thing!

November 2, 2018

The market’s attention recently shifted to labor costs which have begun to accelerate.  Most economists fear that rapidly rising wages will lead to a further pickup in inflation, force the Fed to quicken the pace of rate hikes, and eventually lead to the demise of the expansion.  But people are looking at the wrong thing!  They should be looking at labor costs adjusted for changes in productivity.  Doing so completely alters the conclusion.

There are lots of different measures of wage pressures.  Many people focus on average hourly earnings.  We see it every month as part of the employment report.  It is easy to track.  This measure of earnings has risen 3.1% in the past year which is the largest yearly increase in a decade.  It is clearly accelerating and making people nervous.  But this series only tells us about changes in hourly wages.  It is does not tell us anything about what is happening with benefits.

The employment cost index is less well known largely because it comes out once per quarter.  It is a broader measure of labor costs and includes changes in both hourly compensation and benefits. Recently released data for the third quarter show a year-over-year increase of 2.8% which, like average hourly earnings,  is the fastest in a decade.  Given that labor costs are about two-thirds of a firm’s overall cost, many economists now conclude that a pickup in labor costs will create an incentive for firms to raise prices.  Not so fast.  There is more to the story.

Suppose I pay you 3% higher wages.  My labor costs have risen, and I will be tempted to raise prices.  But what if I pay you 3% more money because you are 3% more productive?  I really do not care.  You are giving me 3% more output.  You have earned your fatter paycheck.  So, what we need to follow are labor costs adjusted for the changes in productivity.  Economists have a fancy word for that concept —  “unit labor costs”.  This index is even more obscure.  It is buried in the quarterly report on productivity.  This past week the Labor Department published data on productivity and unit labor costs for the third quarter.  It showed that ULC’s rose a modest 1.2% in the third quarter and have risen just 1.5% in the past year.  More interesting is the fact that this series is suddenly trending lower.  In the middle of last year unit labor costs were rising 2.5%.  They have since slowed to 1.5%.  How can that be?  Answer:  Productivity growth has accelerated.

The increase in unit labor costs can be split between two parts.  Compensation growth in the past year of 2.8% is about the same as other measures of wage costs.  But productivity has risen 1.3%.  Thus, unit labor costs – the difference between the two numbers — has risen 1.5% and, as noted earlier, they are slowing down.

Without a doubt faster growth in productivity is a result of the sustained pickup in investment spending since the November 2016 election.  It has been fueled by the cut in the corporate tax rate, repatriation of earnings from overseas by large multi-national firms, and an extraordinary pace of deregulation.

We expect these same factors to sustain growth in investment spending for the foreseeable future.  In addition, with the unemployment rate at nearly a 50-year low and workers hard to find, firms might consider spending money on technology to boost productivity growth amongst existing employees and increase output.  Additional spending on technology from this source should enhance investment spending in the quarters ahead.  Productivity will continue to climb and  upward pressure on wages should be largely offset.  Next year we expect compensation to increase 3.7% in 2018 (versus 2.8% currently) because of additional tightness in the labor market.  We also expect productivity to rise 1.8% (versus 1.5% right now).  As a result, unit labor costs by the end of next year should rise 1.8% (versus 1.5% now).  They should continue to climb at a slower pace than the Fed’s targeted inflation rate  of 2.0%.  Virtually no upward pressure on inflation from this source.

Technology has completely changed the game.  It is boosting investment and productivity.  It is raising our economic speed limit.  It is accelerating growth in our standard of living.  And it is helping to keep inflation in check by boosting productivity and offsetting much of the increase in wages.  And we are just beginning to recognize the extent to which this has occurred.

As a slightly different way of highlighting the impact of technology on inflation, split the CPI into two pieces – changes in good prices versus services.  In the past year goods prices have declined 0.3%.  Prices of services rose 3.0%.  Why?  Goods-producing firms have virtually no pricing power.  Whenever consumers want to buy anything, we shop the internet, Amazon in particular.  We can find the lowest price in our city, our state, the country, or even the world.  Thus, prices are not rising for roughly one-third of the goods and services offered for sale in our economy.  That clearly is keeping the inflation rate in check.

The inflation rate may continue to climb in the months and quarters ahead, but its acceleration will be very gradual.  Last year the CPI excluding food and energy rose 1.8%.  It should rise 2.2% this year and 2.4% in 2019.  Such a gradual pickup in inflation will not bother the Fed.  In fact, they have already said they will accept an inflation rate slightly above target for a while because it was so far below target for an extended period.

Accelerating wages bother people because they fear it will lead to more rapid inflation.  But they are getting themselves spooked because they are looking at the wrong thing.  They should be looking at labor costs adjusted for changes in  productivity or unit labor costs.  When they do that, they find that this adjusted wage measure is not only growing at a rate below the Fed’s 2.0% targeted rate of inflation, it is slowing down.  Don’t get alarmed quite yet.

Stephen D. Slifer


Charleston, S.C.