Former Fed Vice-Chairman Stanley Fischer told Bloomberg TV on October 4, “I still believe we will have higher inflation. The basic mechanism here is unemployment is declining all the time, wages will start going up at some stage.”
A 9% reduction in hours worked at wages below $19/hour.
A reduction of over $100 million per year in total payroll for low-wage jobs, measured as total sum of increased wages received less wages lost due to employment reductions. Total payroll losses average about $125 per job per month.
The findings that total payroll for low-wage jobs declined rather than rose as a consequence of the 2016 minimum wage increase is at odds with most prior studies of minimum wage laws. These differences likely reflect methodological improvements made possible by Washington State’s exceptional individual-level data. When we replicate methods used in previous studies, we produce the same results as previously found.
This is an issue that's debated over and over again, mostly with poor methodologies to come to the desired conclusion.
In contrast, the NBER had "exceptional individual-level data."
By the way, and as discussed in Staggering Rent Increases in 2017, the median U.S. rental now requires 29% of median monthly income, according to Zillow. Between 1985 and 2000, renters spent about 25.8% of their income on housing.
Next, factor in student debt.
Finally, note the staggering fact that 24% of millennials are still paying down Christmas purchases from 2016.
The theory claims there is a historical inverse relationship between rates of unemployment and corresponding rates of inflation.
In short, falling unemployment will lead to a rise in inflation.
In March of 2017, Janet Yellen commented in a post-FOMC Q&A “The Phillips Curve is Alive“.
Also note that Stanley Fischer also mentioned falling unemployment as a determinant for rising inflation.
Declining Unemployment Rebuttal
In advance of the 1973-1975 recession, economist Milton Friedman correctly predicted both inflation and unemployment would increase.
Wikipedia offers this amusing comment:
"In recent years the slope of the Phillips curve appears to have declined and there has been significant questioning of the usefulness of the Phillips curve in predicting inflation. Nonetheless, the Phillips curve remains the primary framework for understanding and forecasting inflation used in central banks."
It's rather amazing anyone still has faith in Phillips Curve nonsense.
Yet the outgoing Fed Chair, Janet Yellen, and the former Vice-Chair, Stanley Fischer, are believers.
Reason Number Three - Trump Tax Cuts
At the December meeting, the Fed upped its estimate of GDP growth on the expectation Congress would pass a tax bill.
"Most participants indicated that prospective changes in federal tax policy were a factor that led them to boost their projections of real GDP growth over the next couple of years; some participants, however, noted that they had already incorporated at least some effects of future tax cuts in their September projections."
"Given that record earnings and depressed corporate borrowing rates have not sufficed to boost net domestic investment beyond half of its historical norm, and prior tax windfalls (e.g. the 2004 repatriation holiday) were almost entirely expended on dividends and stock buybacks, there’s little reason to expect any sort of durable surge in capital spending. That’s particularly true given a 4.1% unemployment rate and already deep account deficits, since rapid growth in capital spending invariably emerges from wholly opposite conditions."
"One of the most outrageous fallacies put forward by economists over the past year is that lower US corporate tax rates will cause the repatriation of offshore cash balances. This view, which is widely endorsed by many analysts, fails to reflect the true nature of offshore tax schemes and how problematic it will be to reverse these complex transactions."
I suggest reading Whalen's excellent article to understand the numerous complexities involved.
Reason Number Four - Falling Dollar
The general theory in play is that a falling dollar means rising commodities and higher prices on goods, especially imports.
Falling Dollar Rebuttal
The above chart shows the year-over-year percentage change in the Personal Consumption Expenditures (PCE) price index vs the year-over-year change the US dollar index.
San Francisco John Williams has stated that the Fed's 2 percent inflation target requires some rethinking, and likely needs to be higher.
What a hoot! Despite massive amounts of QE the Fed could not hits its inflation target using its own measure of inflation as a definition. Somehow they magically believe that setting a higher target will in and ofitself cause inflation.
Imagine what 6% mortgages would do to home price affordability.
Throw conventional wisdom in the ash can. In practice, the more debt and leverage the Fed stuffs into the system, the lower interest rates must be to support that level of debt.
We are close to the end of this inflationary cycle just as the average analyst thinks inflation is about to pick up.
The Fed might even buy into the notion of rising inflation, especially if crude does spike in early 2018.
Then economists will accuse the Fed of "hiking too much" when the fact of the matter is the Fed once again held interest rates too low, too long, in a foolish attempt to cram more debt into a system literally choking on debt.
Currency Crisis, Debt Deflation on Deck
Another round of debt deflation. a currency crisis, or both is in the cards. Timing is the only issue. It's far too late to believe anything reasonable can be done about the mess the Fed has created.
Do yourself a favor, buy gold. It's a strong favorite to soar when faith in central banks comes into question.
Addendum: A reader asked that I put in my definition of inflation.
Here it is, as I have noted in the past: Inflation is an increase in money supply and credit with credit marked to market. This is how things work in a "practical" sense, in a fiat-credit driven world.
In places like Zimbabwe or Weimar Germany there was little to no credit relatively speaking. Monetary expansion, not credit, is then the sole determinant.
In most of the modern world, viewing inflation solely in terms of money supply is a mistake. Credit expansion is running rampant, just as it was with the housing bubble in 2006. Thus, by my measure, we are in a state of substantial inflation right now.
As we saw in 2007, all hell breaks loose when banks become capital impaired and people do things like "walk away" from mortgages. Some use the term "debt deflation" for such events. Banks cannot lend when they become credit impaired. Economic expansion stops, and asset prices plunge even though overall prices as measured by the Fed's preferred measure decline only a small bit.
It's not necessary for consumer prices to fall by my definition, but it's likely they will.