Wednesday, October 28, 2015

Inflation Puzzle: Back In Time

"Inflation typically rises during an economic expansion, peaks slightly after the onset of recession, and then continues to decline through the first year or two of recovery. During the present U.S. expansion, however, inflation has taken a markedly different path. Although more than six years have passed since ____, inflation in the core CPI (the consumer price index excluding its volatile food and energy components) has yet to accelerate."
Guess the missing time line in the above paragraph. It is from a paper from NY Fed, dated 1997. It refers to the 1990-91 recession. But it could easily apply to the 2008 GFC. With the benefit of hindsight, it is now questionable if the Fed should have been more hawkish during the 90s and 2000s to avoid the great financial meltdown. But in 1997, with all fairness, there was little support for more hawkishness in data.

A recent Bloomberg article talks about six million reasons for Yellen to think before raising rates. But I wonder if we will ever have those kind of jobs back in listing which the 60 somethings like Mr Elanko are skilled for. 20 somethings are working overtime and designing apps against Miss Yellen.

In a case of structural unemployment, the numbers matter less than the rate of increase in wage and employment cost. The Fed knows it. So for me, a December pause is more worrying than a hike.

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