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Posts from the ‘Prices’ 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

CPI’s History Is Not Just About Bureaucrats

Every month, the Bureau of Labor Statistics releases the Consumer Price Index to a wide range of commentary. Policymakers often debate whether the CPI accurately measures inflation. But you might be interested to know that the history of the CPI is not simply about bureaucrats sitting in an office on the Potomac. In fact, the CPI has its roots in important economic and political events of the late 19th and early 20th century.

The precursor to the CPI was an in-depth report on the 1890 McKinley Tariff, which raised import duties to an astronomical 50 percent. The tariff was meant to protect U.S. industries but in the end hurt consumers in the form of higher prices. Early work measuring price inflation ultimately led to the repeal of the McKinley Tariff to the benefit of the consumer.

Read more

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.

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.

What If We Banned Tipping?

Tipping in America is an experience fraught with uncertainty. How much should you toss in the jar at the coffee shop? Are you supposed to tip on takeout? Debates break out at the end of otherwise peaceful meals and spill over onto online forums: Is 15 percent the standard these days, or 20? What if the service is unfriendly or slow? Do you calculate the tip before tax, or after?

A vocal anti-tipping contingent argues that we should just bag the confusing ordeal and ban tipping altogether. Freakonomics’ Stephen Dubner argues that tipping encourages discrimination by race, gender, weight, and even hair color (blondes come out ahead). Elizabeth Gunnison Dunn of Esquire says the practice is unfair, since many customers don’t realize that tips aren’t just a show of appreciation. Servers often earn just $2 or $3 an hour, which means they rely on tips to make a living wage.

Michael Lynn, a professor of consumer behavior at Cornell University, says that tipping also creates unnecessary stress for clientele :

I think it’s quite possible that tipping norms undermine overall satisfaction or happiness. The social pressures people feel to give up money they would rather keep, for them tipping is a net loss. And it’s very possible that that net loss exceed the benefits.

Framed in this light, tipping seems to have a lot of disadvantages. So what would happen if we got rid of tips and paid servers more? I asked a few of AIER‘s economists to imagine the fallout.

Researcher Anca Cojoc says a decline in the quality of customer service would be one likely effect.  “If you replace tips with fixed salaries, servers’ incentives to provide great service change,” she says. “They already know they’ll get a certain amount of money, and so they’ll put in as little effort as possible.” Read more

The Marketplace of Ideas

Here’s what’s going on in the online world of economics.

  • What people in Brazil are really protesting, by anthropologist Erika Robb Larkins: “The bus fare is a metaphor for the system in Brazil as a whole and it is about raising the costs on something that already barely works. People have to pay a lot for something that just barely passes for functional.” [Cherokee Gothic]
  • Richard Posner offers one way to reduce the cost of health care in the U.S.: switch physicians to a professional model of providing services, along the lines of salaried government employees. “In a medical system governed by the professional model, physicians’ incentive to establish “surgical centers” in their offices in which to perform colonoscopies for which they can charge much higher prices, though there is no need for such centers, is weakened, because physicians imbued with the professional model do not think of themselves, or behave, as profit maximizers. [The Becker-Posner Blog]
  • If you think playing by the rules will make you immune to the dangers of government surveillance, Alex Tabarrok has got some bad news: “It is easy to violate the law without intent or knowledge. Most crimes used to be based on the common law and ancient understandings of wrong (murder, assault, theft and so on) but today there are thousands of federal criminal laws that bear no relation to common law or common understanding.”
  • How debased silver coins plunged the Holy Roman Empire into financial crisis back in 1620, by James Narron and David Skeie: “As Vilar notes in A History of Gold and Money, once ‘agriculture laid down the plow’ at the peak of the crisis and farmers turned to coin clipping as a livelihood, devaluation, hyperinflation, early forms of currency wars, and crude capital controls were either firmly in place or not far behind.” [Liberty Street Economics, thanks to Steve for the link!]
  • If you want people to perform their best, Robin Hanson suggests using negative feedback to punish the worst rather than rewarding the top achievers. This advice goes against all my experience with teaching; what do you think? [Overcoming Bias]

How Pearls Lost Their Status Symbol Sheen

In Baz Luhrmann’s glitzy new film adaptation of The Great Gatsby, pearls play at least as big a role as Dr. T.J. Eckleburg. In one of the movie’s flashbacks, we see the swinish Tom give Daisy a three-strand pearl necklace worth $350,000–over $4.6 million in today’s dollars. Later, Daisy tears the pearls from her neck as she tries to break off the engagement, scattering hundreds of silver-white beads across the floor. The symbolism is clear: pearls represent the immense, old money wealth that both protects and limits Daisy.

These days, pearls remain a popular choice for well-heeled businesswomen and ladies who lunch. But they’re not the status symbol they used to be. A three-strand pearl necklace from Tiffany & Co.’s new Gatsby collection costs just $1,000. Given the company’s reputation, it’s a safe bet that these are high-quality gems. Yet while in the early 20th century, a fine pearl necklace could be swapped for a Manhattan mansion, today a version from one of the world’s most reputable luxury retailers can be had for the price of a month’s rent–in Brooklyn, with roommates.

So how did pearls go from patrician to (somewhat more) populist? Like so many modern-day economic puzzles, the answer comes down to two things: technological innovation and the global marketplace. Read more