Inflation - what is your view on labor slack?

Inflation is coming! Inflation is coming! 

Perhaps we should hold off with this view until we can answer some simple questions. All are focused on the same question of slack.

• Can we have sustained inflation if there is slack in the labor market?  
• Can we have sustained inflation if there is slack in factory capacity? 
• Can we have sustained inflation if there is an output gap?

There is agreement that inflation should move higher if we see these gaps start to close; however, it is not clear how much higher we can go beyond 2% if there is not a full closure of these gaps. Additionally, there is a question with defining what is slack. If workers are discouraged and leave the workforce, there can be a tightening of labor markets with lower labor participation. Perceived slack could be high but labor tight. 

Before you say anything about inflation tell me about your view on slack. 

For recent inflation numbers see Inflation - Not what was expected, not what is wanted.

To move to pre-COVID levels, we will need unemployment to fall by over 2.5%. 

To reach old capacity utilization levels, we need an increase of 2.5%.

Prices paid by service providers have almost reached the highest levels since the GFC and prices paid by manufacturers have moved back to 2018 levels.