Is Low Inflation a Quirk or a Trend?
There are signs that both transitory issues and long-term headwinds are conspiring to keep price levels below the Fed’s target for now, but higher inflation is still a possibility.
About the only economic news of real consequence this week was Friday's inflation report, which showed surprisingly low inflation for the month of July on both a month-to-month and year-over-year basis. The month-to-month inflation rate was just 0.1% (1.2% annualized) while year-over-year inflation was 1.7%. Both numbers were below expectations of 0.2% and 1.8%, respectively. Inflation has now been below expectations for six months in a row, suggesting issues in the Fed's efforts to raise inflation rates closer to 2%. Most of our report will suggest both a short-term and longer-term outlook for inflation.
Data on productivity hinted that the poor efficiency numbers of late 2016 are now looking substantially better, moving from negative productivity growth to 1.2% for second-quarter 2017. Nevertheless, that number is still well below the 2.1% longer-term rate. However, a more careful review of long-term data suggests that the average overstates the real rate of past productivity growth. In other news, data from the National Federation of Independent Business suggested that concerns about finding workers have reached a new recovery high. Meanwhile, the Job Openings and Labor Turnover report showed that job openings topped 6 million and are now at an all-time high. These two data points as well as last week's labor report and ongoing initial unemployment claims data suggest that worker shortages are quickly becoming a much bigger issue than job availability.