Before the Fed Meeting: Inflation Hawks, Draw in Your Talons!

March 18th, 2014 at 2:08 pm

I’m confident one can trust the Yellen-led Fed to largely tune out the building chorus telling them to pre-emptively tighten because somewhere, somehow, there’s some inflation out there.

That doesn’t mean they’re all inflation doves—remember, Yellen was bugging Greenspan to tighten in the mid-1990s (thankfully, he didn’t take her advice as the economy hit full employment and price pressures failed to appear).  It just means that in weighting their dual goals, based on the data, they should still be up-weighting full employment over price stability.  Output gaps remain a much larger challenge than price pressures.

Some arguments on behalf of the above:

Wage pressures…really? According to the BLS earnings report out this morning, average earnings before inflation were up 2.2% year-over-year (that’s the best way to asses these noisy monthly data).  A year ago, they were up 2.1%.  Nothing much to see there.

Also, weekly hours have fallen in the last few months, and while weather’s possibly playing a role in that result, weekly earnings have decelerated quite sharply, from 2.1% a year ago to 1.3% now.  Again, take the weather out and maybe that trend is flat, but no acceleration to speak of.

–There’s more of an acceleration in the pay of middle-wage workers (versus the overall average), but as I show here it’s both gradual and clearly not bleeding into price growth.  And for crying out loud, wouldn’t it actually be smart and even a bit compassionate to tolerate some wage gains for folks who’ve been pretty much left out of this recovery thus far?!

–Inflation is the bottom line here and as the figure below shows, core prices have been decelerating for the last couple of years.  Now, the hawks claim to be looking round corners and seeing price pressures where others cannot.  But the Cleveland Fed’s five-year-ahead expectations index remains extremely well-anchored below 2%.

–Unit labor costs—compensation growth relative to productivity, so an important indicator of any wage-push inflation—fell a percent in the most recent data (see table 2; again, I’m looking at yr/yr), and have also decelerated over the past few years.

Based on these types of observations, I expect the Fed to continue the $10bn/meeting taper and to make sounds about how they’re watching the data like hawks…just not inflation hawks.


Source: BLS, BEA, and Cleveland Fed


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12 comments in reply to "Before the Fed Meeting: Inflation Hawks, Draw in Your Talons!"

  1. Robert Buttons says:

    I consume food and gas, so the core numbers don’t interest me much. Food and beverage was up 3.6% (annualized,unadjusted). Gas was up 13.2% (annualized,unadjusted). The summer driving season should be interesting.

    As an aside:
    Healthcare was up 8.4% (annualized,unadjusted).

  2. Peter K. says:

    Completely disagree with Mr. Buttons and his cohorts who have been predicting inflation for years. When will they mark their beliefs to market?

    As Dean Baker would say, Greenspan wisely ignored Yellen but failed to counter the Tech and Housing bubbles. Will Yellen and company be able to thread the needle and allow wage inflation while preventing a repeat of history and the next bubble via regulations? I’m sure they would appreciate an assist from fiscal and trade/currency policy.

    • Robert Buttons says:

      I think you are missing the point of my post. There is inflation, but the core CPI is too myopic to detect it.

  3. Larry Signor says:

    There has been almost no, none, zero wage inflation since 1980. See this amazing graph by Atif Mian and Amir Sufi at House of Debt:

    Wage inflation could not have caused any bubbles. We can argue about the compilation of the CPE, CPI or any other measure, but inflation has not been driven by wage growth. We need wage driven inflation to even approach full employment and mitigate the debt overhang of the housing bubble. Back of the envelope seems to me to be 3-4 yrs. of 3.5-4% inflation. Now that’s realignment.

    • Robert Buttons says:

      4yrs of 4% inflation will take gas prices to $4.00. I will leave it up to you to explain to the American people why $4.00 gas is a good thing.

      • Jonas says:

        Uh huh. And four years of four percent inflation would take a $30,000 per year salary to $35,000 per year. I will leave it to you to explain how, if your income goes up seventeen percent and your costs go up seventeen percent, you are worse off.

        • Robert buttons says:

          If your model is correct the term “real wages” wouldn’t exist. It would be just “wages”.

          • urban legend says:

            In your model, $4.00 gas is not “real gas,” either. If you won’t take (nominal) $4.00 gas when you’ve seen your (nominal) income go from $30,000 to $35,000, you need some intervention.

          • jonas says:

            What I described is not a model; it’s a hypothetical.

      • Larry Signor says:

        We will have 4.00/gallon gas by fall of 2014. This is not inflation but structural manipulation by the industry. Inflation helps lower the burden of fixed rate debt and the value of fixed rate assets, resulting in wealth redistribution and less income inequality. Higher momentary demand also occurs, becoming structural demand with time. Hence raising employment and economic growth. A Ponzi scheme, but we built it and now must learn to operate it.

  4. D. C. Sessions says:

    It just means that in weighting their dual goals

    Let’s be honest here, shall we? The dual goals are:

    * At most 2% inflation
    * Full employment, defined to be “as much employment as is consistent with at most 2% wage increases.”

    In other words, “prevent increases in real wages.”