Can Inflation Be Too Low?

FROM THE CONFERENCE BOARD– The April job increase, and upward revisions for earlier months, was a pleasant early spring surprise.

Still, the fundamental problem, four years after the official end of recession, is the continued lack of more final demand, holding firms back from hiring faster.

This is especially pronounced in the service sector (excluding health and education). Regionally, the problem runs inland from both coasts.

Only the south Atlantic region (from Maryland down to Florida) and the West North Central region (basically St. Louis north to Minneapolis) show above trend growth in service sector jobs through March.

Higher withholding rates, sequester, lack of consumer confidence, and slow economic growth abroad are reasons why job gains in this sector in these regions continue to underperform – with few signs of any big change during the next few months.

Tuesday, May 7 Consumer Credit, March (The Federal Reserve)

Consumer spending, especially on big-ticket items other than vehicles, turned softer in March, as consumer sentiment turned cautious and confused. Consumer credit demand, except for vehicles, very likely dipped a little in March.

Paying down debt remains the key driver in consumer plans when expectations about the overall economy or their household situation remain iffy. Less credit and more savings probably will continue to characterize consumer behavior this spring and summer.

THE GLOBAL SITUATION

Global output seemed poised to recover this past winter.

Data this spring instead reflect continued general weakness, with some notable exceptions.

The latest survey of purchasing managers in the U.S. (by the Institute for Supply Management) showed a decline to 50.7 in May from 51.3 in April. In the euro-zone, the PMI (Markit) fell to a reading of 46.7, with even Germany showing a decline.

In China (HSBC), it edged lower to 50.6 while India fell to 51, its lowest reading in a year and a half. Conversely, South Korea, Indonesia, and even Japan showed an uptick.

FACT OF THE WEEK

NEETS

Global youth unemployment remains high. Census Bureau photo.

The International Labor Organization (ILO) estimates there are as many as 75 million unemployed youth (24 years of age and younger) around the world, or 6% of all those in this age cohort.

Of this group, the OECD estimates 26 million in the developed countries are NEETS – not in employment, education, or training.

A World Bank estimate put the number of NEETS among the youth in developing countries at 260 million. That figure might actually be undercounting NEETS in that it does not include some young women who are not expected to join the workforce in their societies.

One big issue with these youth – who are not working or developing their skills via education or training – is that they are, by definition, just starting out. How many will remain impoverished through their lives?

The even larger issue for the workforce of tomorrow is the fate of the children of these current NEETS.

QUESTION OF THE WEEK

I heard someone recently talk about inflation being too low? Is that even possible?   

Want to ask someone from Japan if it is possible to suffer from too little inflation?

Here’s the problem with not enough inflation. At the firm level, a company facing rising costs but unable to raise prices suffers a loss in profit margin.

The problem with that is not limited to attracting new capital. As George Meany, long-term president of the AFL-CIO said more than a half century ago: “A company that can’t make money, doesn’t have money to hire workers.”

Making enough money to hire, and pay workers, is one problem. Economist George Ackerlof pointed out two decades ago that it also interferes with capital markets.

Too little inflation keeps interest rates low, which discourages savings. That can have a negative impact on overall economic growth, which in turn may put more downward pressure on prices. In short, for a number of reasons, inflation can be too low. How low is too low? That’s a very different discussion.

Source: The Conference Board

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