Caroline Baum tackles the sudden market concern regarding inflation.
All of a sudden, inflation is back.
At least that's what one would be led to believe based on a resurgence of inflation articles, if not the re-emergence of That 70s Scourge itself.
It seems that global growth is turning up the heat on prices. Remember those billion Chinese and Indian workers being inducted into the industrial labor force, offering their services cheaply to any and all bidders? That excess capacity is now gone, based on what I read.
How about the forces of globalization, working to keep costs and prices down? A one-time event.
And what about the adoption of inflation targets by central banks around the world, more committed than ever to price stability? Central banks by and large are currently engaged in raising benchmark interest rates.
Sorry, that doesn't fit today's storyline either.
Wednesday's report on U.S. productivity and costs just added fuel to already glowing embers. In a quarter when real gross domestic product barely budged -- the economy grew 0.6 percent in the first quarter of 2007 -- output per hour worked slowed to 1 percent, half the previous quarter's pace. Unit labor costs, or the cost of producing one unit of output, rose 1.8 percent, a little less than the average for the last decade.
Which makes you wonder what all the Sturm und Drang was about.
`Wage' Inflation
When I read articles about labor costs pushing up prices, it feels as if I'm living in a time warp. Labor unions have reduced bargaining power when corporations can shut a manufacturing plant and shift production overseas. And unionized workers have come to realize that their interests are increasingly aligned with management: If the company goes belly- up, a prospective pay raise is a moot point.
Still the idea that wages drive prices and inflation is something that never dies.
"This kind of thinking is deeply ingrained at the Fed," Glassman says. "It's as if wage gains are carved in stone. That may have been true long ago. It's not true now. There are more price takers."
Inflation Deceleration
All the hoopla over inflation is happening at a time when various inflation measures have rolled over. The core consumer price index, which excludes food and energy, rose 2.3 percent in the year ended in April, down from a 2.9 percent peak in September. The Fed's preferred measure, the core personal consumption expenditures price index, rose 2 percent in the past 12 months, the smallest increase in more than a year, bringing the gauge into the top of the Fed's comfort zone.
That's clearly no comfort to the folks unloading stocks and bonds. Inflation may lag the business cycle, but they see a new cycle dawning. The U.S. slowdown is over, capital goods orders and manufacturing are picking up, and exports are benefiting from strong overseas demand. Inflation is sure to follow.
Don't uncork the champagne just yet.
"It's hard to get a U-turn in the economy without a corresponding rise in consumer demand," Carson says. "And consumer spending is showing incremental weakness."
