Inflatation or Infatuation ?

Bloomberg Businessweek February 17, 2020 pp29. “Inflation Risk is in the Eye of the Beholder”. “Some caution against central bank complacency, saying this year is different”.

With some volatility aside, inflation in the OCED (36 member states Organization for Economic Cooperation and Development) has fallen steeply from nearly 8% in 1990 to 1.66% currently.

Factors arguing against rising inflation are demographics, globalization and continued innovation in technology. With population growth declining in developed countries and with the population aging there is less demand for consumer goods-as demand falls so does price. Globalization provides incredibly competitive markets-more supply equates to lower prices for consumer and durable goods. Newer and more efficient technology are replacing older tools-new entrants and improved efficiency lower costs and prices.

Tight labor markets could add inflationary pressure as the cost of making goods and performing services could rise. What we are seeing is that “average hourly earnings rose an annual 3.1% in January, down from a decade peak of 3.5% last year”. A graph known as the Phillips curve plots inflation versus unemployment. Historically this chart illustrated a strong inverse relationship between unemployment and inflation. That is as unemployment falls inflation rises. Recently that curve is flat. “We’re not in the area where, in light of a dropping jobless rate, wages are rising again”.

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