On February 10, US Federal Reserve Chairperson Jay Powell spoke on the importance of facilitating monetary policy so that the US Reserve Labor Pool is fully utilized. He assured that monetary policy in the US would focus on the slow labor-market recovery following the global financial crisis (GFC). Therefore, the Fed would not make the mistake of anticipating a reduction in purchases of Treasury and agency-based securities made back in 2013. In other words, there will be no ‘topper tantrum’ this time.
The global bond market, however, seems to have thrown a provocation due to the Fed’s non-performing pledge. In the 10 days since Powell’s address, yields on the 10 – year U.S. Treasury note have risen 20 basis points. Is the bond market worried about a rebound in inflation?
Prices of food items, industrial metals and crude oil are rising. There is a big economic stimulus going on in America. The Treasury is pressuring the UK Chancellor to emulate America. In response to Kovid, the U.S. economic stimulus is about 25% of its gross domestic product. Meanwhile, the conference board reported that the chief executive’s confidence was at a 17-year high. The unit labor costs in the non-agricultural business sector are growing at an annual rate of 5.6%, which is at its fastest pace in almost four decades. On the surface, both inflation and inflation seem to be in American air. Why, Europe’s major inflation rate also rose in January.
Economic growth in developed countries is likely to pick up from the second quarter of 2021 or the second half of the year. That will be the base effect of the 2020 contraction. But, lower interest rates and liquidity allocations have added tr 70 trillion tr to global debt levels since the outbreak of 2013. Debt is a weightless. As proof of this, the number of zombie companies in America is much higher than before, but they have tr 2 trillion dollars in debt. Strictly speaking, not all zombie companies — even companies that do not earn enough to cover their interest payments — are zombies. Some will recover. But, the locked capital for most of them is Deadwood. In other words, the reflection still has a good chance of being born.
What about inflation? Well, rising commodity prices, rising unit labor costs, economic expansion and central banks’ housing inflation appear to be the right combination to recover. This is one reason why yields on ten-year bonds have risen significantly from a low of 0.54% in March, to 0.56% and 1.38% in August 2020. Taking these numbers into account, the ten-year treasury has received almost 2% as of the year 2019. Then no one talked about the recovery of inflation. West Texas crude oil prices in early 2020 were slightly higher than they are today. In other words, the recovery of input prices not only has to restore the levels that existed a year ago, but their price increases need to be very large and large enough to affect the overall inflation rate.
In developed countries, labor costs are a key factor in inflation outcomes. Does the increase in labor cost unit of the non-agricultural business sector indicate an inevitable increase in the rate of inflation? Well, the relationship between this index and the consumer price index (or any of its variants, such as the PCE, or personal consumption costs, the headline or the PCE core inflation rate) has been broken since the 1980s. An increase in unit labor costs is probably a better indicator of a decline in production in some sectors than an increase in wage costs. In addition, the Federal Reserve Bank of San Francisco warned in its August 2020 Economic Letter that caution should be exercised. She called the letter a ‘wage growth illusion’. Average wages increased because companies — especially small ones — laid off their low-wage workers first. Total wage costs decreased, but average increased. The authors show that in the second quarter of 2020 the wages of continuously employed workers increased by only 2.4% per year, while the average weekly earnings increased by 8 percentage points. Proving this is the total compensation costs measured by the Employment Expenditure Index. At 2.5% in the fourth quarter of 2020, they were much lower than the 2.9% peak reached in the fourth quarter of 2018. Therefore, it is not surprising that the PCE core inflation rate was around 1.5% in December.
In short, although the fear of inflation is not mis-established, it is premature. What we already have plenty of is inflation in property prices. That train left the station a long time ago. The central banks have abandoned it and are still aving into the past. After that train finally stops, the effect becomes inflation every time. The central banks will probably go full mont on monetary policy, and then we will have inflation.
It looks like the story of the next American president. This may be the final act of post-Bretton Woods world monetary rule. For now, the property-price roller-coaster needs to be prepared for the upcoming big plunge.
V. Anantha Nageshwaran is a member of the Prime Minister’s Economic Advisory Council. These are the personal views of the author.