Looking at the inflation numbers across time provides some interesting relationships that should be kept in mind as the talk of stagflation heats up.
1. Inflation is a lagging indicator relative to the business cycle and does not peak until the economy is well in recession. This relationship may not change with this recession. This peaking may be related to recessions being associated with supply shocks. All recessions have been preceded by a an oil price shock. Of course, there have been some price shocks which did not lead to recession but the current environment is holding true to form. The idea of stagflation has to be given a clearer definition. Just because inflation will peak during a recession does not mean that we have stagflation.
2. The link between CPI and Core CPI has changed and now has a lower correlation. The core CPI ex food and energy has been surprisingly steady which means that the commodity shocks has not translated to prices in other areas of the economy. This may be due to the globalization effect, but as we see more inflation in the emerging market countries, especially China, there should be an increase in costs in the US. There has not been the wage price spiral that we have seen in the 1970's during this run-up in prices.
1. Inflation is a lagging indicator relative to the business cycle and does not peak until the economy is well in recession. This relationship may not change with this recession. This peaking may be related to recessions being associated with supply shocks. All recessions have been preceded by a an oil price shock. Of course, there have been some price shocks which did not lead to recession but the current environment is holding true to form. The idea of stagflation has to be given a clearer definition. Just because inflation will peak during a recession does not mean that we have stagflation.
2. The link between CPI and Core CPI has changed and now has a lower correlation. The core CPI ex food and energy has been surprisingly steady which means that the commodity shocks has not translated to prices in other areas of the economy. This may be due to the globalization effect, but as we see more inflation in the emerging market countries, especially China, there should be an increase in costs in the US. There has not been the wage price spiral that we have seen in the 1970's during this run-up in prices.
3. Link between CPI and PPI is not as strong as previous periods. Usually the correlation has been extremely high especially during the 1970's. Part of this change reflects the mix in the economy to more services. However, there has been a shift in the PPI and CPI relationship. For most of the 1990's, PPI was often lower than CPI. Over the last three years, there has been a shift with PPI increases leading CPI and having a much larger gap between the two inflation measures.
4. Wage rates have not moved with CPI. There has not been as close a link between wages and CPI. Hence there has been a fall in real wages in the US that has not matched by the increases in productivity. The decline in wages will place a drag on consumer spending.
The current movement in inflation is showing some unique features and may not fit within a specific historical period.
No comments:
Post a Comment