PROTECTING SMALL BUSINESS, PROMOTING ENTREPRENEURSHIP

Inflation, Economic Growth and the Labor Market

By at 13 September, 2018, 10:52 am

Small Business Insider

by Raymond J. Keating-

The U.S. Bureau of Labor Statistics reported that the Consumer Price Index (CPI) increased by 0.2 percent in August.

Over the past 12 months, the BLS reported that CPI inflation ran at 2.7 percent. And if we look at the last six months, the annualized rate of inflation was only 1.6 percent. Starting in February of this year, monthly CPI inflation has slowed dramatically after a six-month spike.

This recent calming of inflation coincides with a step up in economic growth. That should not be surprising given that increased production of goods and services works against inflation, given that, as the old saying goes, inflation results from too much money chasing too few goods.

In addition, it must be noted that the Federal Reserve, after running unprecedented loose money since the credit meltdown of late summer 2008, has finally started reining in the monetary base. This process began in November of last year, and still has a long way to go. But the recent direction is much more productive than what the Fed previously had been doing.

And finally, it is worth addressing the growing concern that “tight labor markets” will result in higher wages and inflation. For example, The Wall Street Journal reported, “Economic growth is ‘continuing to tighten labor markets and continuing to put more upward pressure on inflation,’ Boston Fed President Eric Rosengren told The Wall Street Journal on Saturday.”

This is a troubling but not surprising remark from a Fed official.

Again, it must be understood that inflation is not about too much economic growth or workers earning more, but instead, about money supply outstripping money demand. But it also is worth noting regarding labor markets that the labor force participation rate remains well below where it should be.

For example, the rate actually fell from 62.9 percent in July to 62.7 percent in August. Unfortunately, the labor force participation rate has lurked below 63 percent for about four years now, and that compares to levels at or above 66 percent for most of the two decades leading up to the Great Recession. In fact, the last time the U.S. had a labor force participation rate below 63 percent for an extended period of time was in the late 1970s.

The point regarding the labor force participation rate is that while an unemployment rate of 3.9 percent indicates a tight labor market, the low labor force participation rate shows that there are workers who still have not re-entered the marketplace. Of course, that does not mean that the skills and abilities of those not in the labor force will meet all of the needs of employers. And that leads to additional questions and issues, including the need for immigration reform that actually meets the labor needs of employers and consumers. That, of course, will require the immigration debate to be turned around and pointed in a far more economically realistic and productive direction.

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

Keating’s latest book published by SBE Council is titled Unleashing Small Business Through IP:  The Role of Intellectual Property in Driving Entrepreneurship, Innovation and Investment and it is available free on SBE Council’s website here.

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