Where Is Inflation?

The Wall Street Journal reports that the world’s largest economies are chalking up stronger growth. But the puzzle is, where is inflation?

The U.S. economy grew at an annualized 3 percent in the second quarter and many experts expect the growth to reach 4 percent in the fourth quarter.  Yet, consumer price inflation advanced only 1.7 percent from the previous year.

The Journal’s article by Jon Sindreu goes on to say standard economics teaches that prices are ultimately set by supply and demand, people demand more products and companies need to offer better pay to hire more workers, and so prices go up.

That might work, but not during this economic cycle.

You may recall that in today’s economy, individual consumers made up 60 percent of gross domestic product. Unfortunately, the consumer has been missing from the economy beginning in 2008. This shows why the Obama years were so devastating.  During his eight years, the economy barely made it to 2 percent in growth.  Taxes were high and those 95 million Americans who had given up looking for a job were not counted as unemployed although that is exactly what they were.  America’s young people who should have started work and started a family were mired in student debt and in many cases held college degrees that were not functional and could not get them a job.

Most central banks look for an inflation target of 2 percent.  Lower interest rates are expected to stimulate growth.

The problem has been no growth in the United States.  The growth has been overseas and is reflected in our huge trade imbalance.

With growth only beginning to take place, why in the world would the Federal Reserve be considering another rate hike in 2017?  They have already increased rates twice and the ten-year treasury has dropped to 2.06 percent.  The better path is to let President Trump pass his infrastructure and tax legislation and let the economy rebound.  Allow corporations to bring those trillions of dollars back to invest in America.

The American worker needs to return to making up 60 percent of Gross Domestic Product (GDP). Unfortunately, that has not been the case.  As President Obama stressed globalization, American workers lost out.

Enrique Garcia of the Dallas Federal Reserve Bank published research showing that globalization is part of why inflation has been low and unresponsive to growth.

Companies can outsource production or import if the wage bill starts to get too high, rather than raise salaries.  That is why Donald Trump is president.  I do not give a whit about full employment in China or Vietnam.  Bank of International Settlements Data showed that in the United States, 10 percent of the change in labor costs between 2006 and 2016 was determined by the price of labor aboard, compared with 2 percent between 1995 and 2005.

The political policies of regulation, high taxation, globalization and high national debt have all hurt the American worker.  Unlimited immigration and poor public education have also not helped.  Americans pay for way more government than we need.  If the Federal Reserve does raise rates, what will it mean to paying the interest on $20 trillion of national debt or someday lowering the amount?  We won’t be able to.