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Posts from the ‘Inflation’ Category

Three Takeaways from the April Employment Report

The monthly Employment Situation Report for April from the Bureau of Labor Statistics was followed up by a deluge of press coverage. How can you make sense of the data itself, let alone the cacophony in the press? We have three key takeaways for you:

1) A tightening labor market doesn’t seem to be sparking inflation.

The overall unemployment rate plunged to 6.3 percent in April from 6.7 percent in March. Economists agree that the unemployment rate affects inflation, but they disagree about the nature of that relationship. The Fed estimates the lowest the unemployment rate can go without causing accelerating inflation is about 5.5 percent. But a recent flurry of research suggests it’s the short-term unemployment rate, covering workers unemployed for fewer than six months, that affects inflation, because those out of a job for longer than six months are on the “margins” of the labor market.

That short-term rate fell to 4.1 percent in April from 4.3 percent in March. It has been falling steadily since the end of the recession, and it’s quickly closing in on the pre-recession low of 3.7 percent. Does that mean we should be bracing for a surge in wages, with inflation hot on its heels? Perhaps not: Earlier this week, the employment cost index was reported up only 1.8 percent compared to a year ago in the first quarter, slowing from a 2.0 percent pace in the fourth quarter. For the last four years, the index has been pretty rock solid, wobbling in a tight range between 1.7 and 2.0 percent. No upward pressure there. Meanwhile, the core PCE price index—one of the Fed’s key inflation measures—rose just 1.2 percent compared to a year ago in March. That’s up slightly from 1.1 percent in January and February but far from the 2.4 percent peak pace seen before the recession.

The short-term unemployment rate may have been a better guide to inflation pressures than the overall unemployment rate in the past, but a seemingly rock-bottom short-term rate now isn’t lighting any fires under wages or prices.

2) There may not be any hidden slack in the labor market.

Perhaps we’re not seeing bigger wage gains as unemployment falls because there’s still a lot of “slack” in the labor market. That has been Fed Chair Yellen’s view—you can see our updated “Dashboard” of her key labor market indicators here.

One of Yellen’s theories is that the deep recession caused many unemployed workers to drop out of the labor force altogether. If that’s correct, we should see the labor force participation rate rebound as the economy recovers. But that may be wishful thinking. The participation rate has been declining steadily since the end of the recession, from 65.2 percent in January 2010 to just 62.8 percent in April. While it seemed to have stabilized earlier this year, it ticked down again in April by nearly half a percentage point. That’s the main reason for the big drop in the unemployment rate in April.

As we have been discussing in our Business Cycle Conditions report, the economy is on a slow-but-steady recovery path. Perhaps it’s unwise to expect any big swings in labor market trends this far into the recovery. 

3) Noisy data affect perceptions, but so do revisions.

Along with new data showing a smoking 288,000 gain in non-farm payrolls in April, today’s report included a total of 36,000 in upward revisions to the March and April numbers, to 203,000 and 222,000 respectively. Revisions so far this year have netted a 30,000 gain compared to initially reported results. Last year, net revisions resulted in a 31,000 gain, on average.

The New York Times yesterday ran a compelling bit of analysis that illustrates why people shouldn’t get worked up over month-to-month changes in payrolls, which are mostly just “noise.” But you should also keep in mind that the payrolls numbers we see today will definitely not be the numbers we’re looking at next month, or a year from now.

Our animated chart below shows the initially reported payrolls data over the last year versus the latest reported numbers. Animation may take a few seconds to load.

Nonfarm Payrolls

Rich Uncle Pennybags

Media abounds with articles varying around the theme of “Why This Market Has Room to Run.” Equity market bulls enthusiastically point out that corporate profits have reached an all-time high and continue to grow. This acts as evidence that historical valuations are no longer meaningful. Corporate profits have, in fact, shown an upward trend during the last 30 years. This phenomenon led to the commentary in this month’s inflation report.

Consumer prices are ultimately a function of labor costs, raw material costs, and profit margins. As many commodities prices have trended down in the last two years, companies faced a business decision: drop prices in an effort to capture market share or maintain prices and effectively increase margins. At the aggregate level, it seems companies have largely decided to choose the latter and bolster profit margins.

Businesses and executives have short-term incentives to drive profit margins higher as long as the consumer is willing to accept them. When raw material prices increase, the prices may be passed along the value chain to the end consumer. But when raw materials decrease in cost, as has been the recent case, companies are not likely to pass along the savings unless competitive forces command it. Increasing margins have encouraged stock prices upward, lining the pockets of stockholders and executives. When a business increases margins it means “ker-ching” for Mr. and Ms. CEO.

A July 2013 Business Inflation Expectations Survey from the Atlanta Fed asked businesses how they would respond to a ten percent increase or decrease in raw materials costs. The survey found that a decrease in costs would be met with decreased consumer prices for about 25 percent of businesses. On the other hand, an increase in costs would be met with increased prices for about 52 percent of businesses. Increased costs are passed along to the consumer, but savings are not.

Daily Inflation Surges

Another month of ho-hum inflation in December left the CPI annual figure at 1.5 percent, on the low end of the historical spectrum but squarely within the typical annual range.

The new year, however, has seen inflation as measured by daily metrics surge to a 0.4 percent monthly rate, the highest since April 2013. This is likely the effect of arctic temperatures across the country pushing natural gas energy prices upward. As the demand for home heating fuels has surged, so have prices.

02/2014 Inflation Report Moneyness

Our most recent Inflation Report coined a term, moneyness, meant to describe the potency that money exerts as it flows through the economy. Moneyness is a concept that helps us understand the ability of money to fuel the economy.

Economists use two primary metrics to measure the speed and magnitude at which money moves through the economy: the “money multiplier” and the “velocity of money.” The money multiplier measures how often a dollar gets loaned. Money velocity measures how quickly money moves in and out of consumers’ pockets. Both of these measures are at historically low levels. Moneyness just isn’t what it used to be.

Moneyness tends to be a slow-moving metric, one that we would expect to take several quarters to really turn around. But the recent spike in daily inflation reiterates that no economy is immune to inflation. Prices are, after all, subject to the laws of supply and demand.

In the case of home heating fuels, demand has experienced a shock, causing prices to rise dramatically.

Please see our February Inflation Report for a full explanation of moneyness and a historical perspective on inflation.

AIER In the News: Washington Post Edition

iconThe Washington Post published a story Thursday regarding a decline in U.S. stocks despite a series of strong economic reports. The Post turned to AIER for a comment on what was happening.

From the Post:

The rise in inflation shows the “continued healing of the U.S. economy” and the resurgence of consumer demand, said Steven Cunningham, the chief economist of the American Institute for Economic Research. “This is an economy returning to a normal inflationary pattern.”

The story goes on to explain that factors like increasing confidence among U.S. home builders and an unexpected drop in jobless benefits claims, while good signs for the economy, made investors nervous that the Federal Reserve would start to reduce its bond-buying program. As a result, stocks took a dip on Thursday.

You can read the full story here.

A Surprise Bump in June Prices

The Consumer Price Index rose 0.5 percent in June–0.2 percent more than economists had predicted. AIER’s Steven Cunningham talked with Annalyn Kurtz of CNN Money about what recent price increases can tell us about future inflation:

“Inflation signs we’re seeing don’t point to some sort of hyperinflation, but it does suggest there are normal inflationary pressures in the economy which may be a sign of further recovery,” said Steve Cunningham, director of research and education at the American Institute for Economic Research. “As long as it’s well contained, there’s no fear of a bigger problem.”

While price increases remain modest, Cunningham tells CNN Money that building inflationary pressures may prompt the Federal Reserve System to begin scaling back its stimulus program:

“The Fed has been so aggressive in its expansionary policy, and people are concerned that will ultimately manifest in an uncomfortably high inflation rate,” Cunningham said. “As we see signs of inflation picking up, that makes it more likely the Fed will start to take a less aggressive stance.”

Check out the whole article here, and look for AIER’s own Everyday Price Index update tomorrow.

Understanding the End of Easing

This week, Federal Reserve Chairman Ben Bernanke indicated that the central bank is likely to start winding down its monetary easing program. Assuming U.S. economic growth continues apace, Bernanke anticipates pulling back later in 2013. A look at Dr. Polina Vlasenko’s recent article “Easy Money Talks” can help provide context for the Fed’s decision.

Vlasenko explains that while the Fed’s monthly bond buying may improve the economy in the short term, two issues make the strategy less than ideal in the long run. They are:

1. The Fed can increase the money supply, but it can’t control where the money goes.

Right now, banks are sitting on enormous stockpiles of extra cash. “Of the $530 billion the Fed has added to its balance sheet since September,” Vlasenko writes, “about $360 billion stayed in banks as excess reserves.” Money that’s not being lent can’t create additional economic activity–which is the goal of the easing program.

2. What borrowing and lending the policy does encourage may put the economy in a risky position.

“Easy money and record low interest rates create incentives for everybody to borrow,” Vlasenko writes, “possibly more than is prudent.”

Of course, borrowing is a necessary ingredient for a strong economy. But as the most recent global financial crisis showed, excessive debt can put people, businesses, and governments in danger. Moreover, Vlasenko argues that a government that becomes too dependent on borrowing may be tempted to sacrifice price stability for the sake of keeping interest rates low.

What do you think about the Fed’s announcement? Is it too soon to unwind easing, or is the timing right on schedule? Let us know in the comments.

For further reading:

Don’t Fear an Easing of the Fed’s Easy-Money Policy [Barron’s]

James Bullard: This is why I dissented at the Fed meeting this week [Washington Post]

What to Expect When You’re Expecting Modest Inflation

AIER’s latest Inflation Report has hit the streets, with Dr. Steven Cunningham offering a sweeping look at the economic forces that drive inflation in the U.S. Here are a few important takeaways from his report.

1. Consumer goods like food and cars are getting more expensive–but cheaper gas and oil have been covering up price increases.

The Consumer Price Index fell 0.4 percent in April, while AIER’s Everyday Price Index dropped 0.8 percent. This news may have some cash-strapped consumers wondering exactly where those cheaper goods and services were showing up. The answer–mostly at the gas pump.

“In both cases,” Cunningham writes, “the decrease was almost entirely the result of oil prices. The CPI Gasoline Index fell 8.1 percent in a single month, while the CPI Energy Index fell 4.3 percent in April after dropping 2.6 percent in March.”

2. Demand is on the rebound. That means price increases are likely to be close behind.

Consumer spending rose in April, as did gross domestic purchases, real GDP, and real disposable personal income. These are all signs of a healthy recovery–but there’s a catch. “As demand continues to rebound, prices are more likely to rebound too, especially when supported by the massive reserves sitting in banks.”

3. The global economic slowdown is helping to keep a lid on inflation in the U.S.

The Euro Area is still stuck in a slump, while growth in Japan and Germany is hovering around zero. Even China’s growth rate is slowing down. “Faced with weak demand at home,” Cunningham writes, “exporters in the Euro Area and China are not inclined to raise prices and risk losing foreign sales.”

So what does all this mean for you? Dr. Cunningham has a few ideas. There’s no need to start running for the hills because of inflation at present, but Americans can expect prices to rise moderately in coming months. On the bright side, investors are likely to see common stocks rise in anticipation of future price increases.

To learn more, check out the Inflation Report in full at AIER’s website.

A Clearer Picture of Inflation

Each month, news outlets report on the ups and downs of inflation as measured by the Consumer Price Index (CPI). But while the CPI is the most widely cited measure of inflation, it’s far from the only one. As AIER’s Dr. Steven Cunningham explains, when journalists and policymakers rely too heavily on the CPI without incorporating other price measures into their analysis, they get a narrow picture of inflation. To learn more about the different measures of inflation, and find out how AIER’s Everyday Price Index offers a unique perspective on the price changes that impact people in their daily lives, watch Dr. Cunningham’s video below.

Are Consumer Prices Down or Up? It Depends Which Index You’re Asking.

Consumer prices fell 0.2 percent in March after rising 0.7 percent the previous month, according to the Consumer Price Index for All Urban Consumers (CPI-U). But AIER‘s Steven Cunningham says there’s more to those numbers than meets the eye. The Bureau of Labor Statistics seasonally adjusts CPI-U data in order to remove the influence of temporary price fluctuations that come from predictable events like holidays, weather changes, and periodic sales. But consumers don’t pay seasonally adjusted prices at the checkout counter. Before seasonal adjustment, consumers actually paid 0.3 percent more for goods and services in March.

At least one thing is clear: Gas prices fell in March any way you look at it, dropping 4.4 percent. (That sound you hear is a collective sigh of relief from commuters across the country.) As AIER discussed in “Pressure Builds Beneath Prices,” gas prices have been particularly volatile over the past few months. They dropped to unsustainable lows as demand sagged and production grew in early winter, then spiked as refineries cut production or went offline for maintenance and unscheduled closings. Now Cunningham says that gas prices are back on trend. This means that we should see more stable prices at the pump for the rest of the year, limiting the effect that gas will have on future consumer price measures.

To get a better picture of consumer prices without the distortion of food and fuel, which tend to experience more frequent price swings, Cunningham recommends looking at the Core CPI.  It rose 0.1 percent in March and 0.2 percent in February on a seasonally adjusted basis. On an unadjusted basis, the Core CPI rose 0.3 percent last month. All this is in line with AIER’s prediction that consumers are likely to see upward pressure on prices this year.

To learn more about where consumer prices are heading, check out AIER’s most recent Inflation Report.

Back to Basics: Understanding Inflation, Debt, and the Great Recession

Now we’ve hit the big time: Personal Finance for Dummies recommends that beginning investors read up on AIER’s economic research before taking the plunge into the stock market. Here’s what they have to say:

Understand basic economics

The average citizen is incredibly ill informed about economics. Yet knowledge of economics is extremely important to everyone’s investment goals. In fact, plenty of financial advisors and stock experts have lost a lot of money for themselves and their clients because they were woefully uninformed about basic economics. Concepts such as supply and demand aren’t distant, arcane abstractions; they affect your money and financial success every day.

If you do read up on economics, look for authors who are well versed in free market principles, which lie at the heart of sound investment decisions. Some of the better economists that the serious stock investor should read are Ludwig von Mises, Mark Skousen, and Kurt Richebacher. Some Web sites that offer excellent economic research are Puplava Securities, Inc., and American Institute for Economic Research.

We’re thrilled to have our research recognized for offering readers accessible information about how the economy works. In honor of the occasion, here are three AIER articles that can help educate readers about the financial world we live in now and how it got to be that way. Read more