Headlines and Inflation
Submitted by Atlas Indicators Investment Advisors on December 28th, 2017
Newsworthy events were not in short supply this year. Right out of the gate, America swore in its 45th president. Shortly thereafter, North Korea began firing ballistic missiles across the Sea of Japan. Then the United Kingdom triggered article 50 of the Lisbon Treaty, starting Brexit negotiations. And these all happened in the first quarter of the year! You get the picture; it was a busy year.
One thing that did not happen this year (again) was the Federal Reserve successfully guiding inflation up to their explicit target. At the beginning of 2017, many pundits “knew” that this was the year the central bank would reach its 2.0 percent objective. Our economy started the year off with an unemployment rate of 4.7 percent, and the ratio trended lower all year. A widely followed economic model, the Phillip’s Curve, led numerous economists to believe the unemployment rate is sufficiently low enough to accelerate inflation as firms compete for labor via higher wages, but this has not materialized. Even the outgoing Chair of the Federal Reserve, Janet Yellen, acknowledged that the persistently low rate of inflation is a mystery.
Experts give many reasons for the slow growth of prices. Technology is usually near the top of the list; as our economy becomes more automated, wages garner less of the nation’s overall output and machines do not consume. Globalization and weaker labor unions also often come up as reasons. Others prefer to mention weak commodity prices as a viable explanation. Atlas has often referred to demographics as a primary driver of this low-inflation phenomenon. Whatever the catalyst(s) of relatively stagnant prices, economists are sure to be busy creating new models in the years ahead.
Unless the mystery of low inflation is solved, the Federal Reserve may not be as busy in 2018 as it was this year. America’s central bank raised the rate banks charge each other for overnight loans three times in 2017. Pundits have penciled in at least three more rate hikes next year. Unless the economy really accelerates in the first half, Atlas is not convinced that many hikes will occur before the end of next December. How’s that for a headline?
