The wholesale cost of U.S. goods and services had the biggest decline in December in five months, largely due to lower gasoline prices. In addition to a big drop in gasoline prices, the cost of other key household expenses like groceries and health care haven’t risen much. And the cost of oil dropped sharply over the course of last year. As such, inflation tapered off towards the end of 2018.
Rolling into the new year, the economy posted an eye-popping 304,000 new jobs in January. Growth is stable for the moment, even if a bit slower than a few months ago. One interesting thing to note about the current historically low unemployment rate — the ratio of those at work relative to the overall population is still lagging pre-crisis levels. As a result, the researchers estimate that the unemployment gap in both the U.S. and a broader group of 18 nations stands at around 1 percentage point compared to pre-recession full-employment years.
At this point, you might be wondering, “Don’t rising wages triggered by a growing U.S. job market signal higher inflation down the road?”
Good question! So far there appears to be little sign of it. Inflation seems to be well-contained at around 2% (the Fed’s goal), and maybe even a bit lower, despite years of super-low unemployment.
Says Scott Anderson, chief economist at Bank of the West, “Real consumer inflation pressures appear a long way off.”
And on January 30th, Fed Chairman Jerome Powell said that the risks of too-high inflation have “diminished.” He also suggested that inflation gains might actually slow before they accelerate again.
The Fed also signaled that it will pause interest-rate increases amid shaky global economic growth and tighter financial conditions. Subdued inflation gives the Federal Reserve the ability to raise interest rates more slowly.
Some have been speculating that the Fed “caved” on raising rates due to pressure from President Trump.
Wharton finance professor Krista Schwarz, who used to work at the New York Federal Reserve Bank, said the Fed’s policy objective “has not changed with regard to inflation and the labor market, but the prevailing risk environment has. That said, Powell communicated more of a wait-and-see stance rather than an explicit shift.” She noted that the Fed funds futures contracts “continue to show consensus expectation for no further rate changes through the end of the year, with little change since the FOMC meeting.”
Some economists are speculating that inflation could accelerate later this year due to a rebound in gas prices and a tight labor market that’s pushing wages higher, but nobody has a crystal ball. The Federal Reserve has taken a firm “wait-and-see” approach before raising interest rates again.
Subdued inflation and the Fed’s “go slow” strategy could be a potential bonus for the stock market as higher rates tend to depress equity prices, but we will have to wait and see as there are a lot more factors in play.
