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A ‘Healthy Level’
"A healthy level of inflation is a sign the economy is healthy," Raphael Bostic said Monday.
He's right. But the key word when it comes to inflation is "healthy."
And even that admits of nuance. From a common sense perspective, even "healthy" (i.e., subdued) inflation is only "healthy" if wage gains for everyday people are commensurate. If that's not the case, working folks become progressively worse off economically.
With that as the brief lead-in, the prices paid gauge on the Empire survey
If I am understanding what you have been saying about inflation, it is this:
If we do not want the “bubble” to pop, the US has to inflate its way out of the bubble. Hopefully, slowly and controlled or else….. POP!
This probably means unskilled, low income labor will be worse off because corporate America is not going to all of the sudden decide to pay a living wage.
Even if Corporate America is told to pay a living wage to its workers, corporations will essentially say “no” to the US government by threatening to replace unskilled workers with screens and robots.
The US government will “cave”, not force corporations to pay a living wage and alternatively, will supplement the low income worker’s wages with more social, UI, tax relief, government provided child care etc. to effectively get those workers to a living wage. Or the US government will pay for college, so they are now “skilled” laborers.
This will cause even more inflation – so the “fix” has to happen slowly over time, giving the economy and the markets time to digest.
Sounds like this will be a good time to be a trader, which I am not. If you don’t think you can trade, then get your dividend/interest income as high as possible and don’t look at the value of your account too often because it is going to be “choppy”. Choppy, I (think) I can handle.
One data point supportive of “temporary” inflation: lumber may have actually peaked in early May, as the supply chain sorts itself out. The front month CME contract has dropped about 25% in a week, which is more than casual; it looks more like a “pop” than a “correction”. It’s hope for some sanity in the housing market, if nothing else.
I am sympathetic to Joe and Jane Everyman. Keep in mind that part of the spike in prices can be sourced from the payouts recently sent out- family of four just got $5600- so that helps with the price of everyday items and may have caused some of the spike too. Price levels probably will go up rapidly for a short time- the Fed’s new policy regime is different this time around and their reaction function is purposely going to be behind the curve. They would like to see prices go up somewhat in excess of 2% for a reasonable time to catch up with the short falls. Using this regime, the bar will be high for pulling back stimulus. So you can safely ignore a lot of the commentary coming out of the Street. This recession is unusual in that demand is bouncing back faster so it is stressing the supply chain. Markets are not perfect but producers of goods along the value chain will get the message and increase production. The Fed does not want to snuff out the reopening with a premature pull back and get whipsawed. They have a thesis on what is going on in the economy and you have to admire them for sticking to their plans at this point. Remember they can always pull back q/e and raise rates easily to slow the economy. It is a lot harder for them to stimulate the economoy with any reasonable effect at the zero bound.
+1. This is it in a nutshell.