The big risk of higher interest rates in the US is to highly leveraged firm. I suspect that many have been able to cover higher interest costs by raising prices under the umbrella of higher inflation. Is this enough, and does it last? I don't know. Junk bond markets don't seem concerned.
But PE firms increasingly are both the borrowers and lenders for highly leveraged firms, more so than junk bonds. PE's hide from oversight, regulators, and transparency like cephalods from light. Which means that's where the systemic risk lies.
Diesel prices are way up, more than gas & oil, which will soon inflate producer prices; however lower Chinese demand for anything related to infrastructure & housing should offset in time. Regardless, Sticky CPI less food, energy, & shelter shows that this is NOT THE 1970's! https://fred.stlouisfed.org/graph/?g=18RIq
I'm still looking for empirical evidence that a strong labor market predicts future inflation. It seem more theoretical than empirical, with the huge exception of Quit Rate to Average Weekly Wages or to lagged ECI. And the Quit Rate is plummeting. I've heard businessmen say that wage inflation needs to get down to 2% or below to keep general inflation at 2%. I think this is a widespread misconception, even infecting some economists, and perhaps even FOMC members? That needs to be addressed theoretically and with historical correlations. Right that column!
I keep looking at periods of high US inflation (Revolutionary War, Civil War, WWI + pandemic, WWII, Korean War, Israeli War, Iranian Revolution, pandemic + Ukraine War), but I just can't find the common denominators. If we could get back to that zeal for a balanced budget then we could push the CPI into deflation (once shelter catches up). But this Republican House seems too incompetent to pull off anything.
You have all the main points, including on wage growth. One more supporting point, if I may, could be added: From the perspective of businesses, it is the unit labor costs that matter. Here are the data on non-farm business sector unit labor costs:
1. Year-on-year growth rates were 6%-7% in Q1-Q2:2022. That has reduced to 2.5% in Q2 2023.
2. Annualized quarterly growth rates were 6%-8.5% in Q1-Q2:2022. It was 2.2% in Q2 2023.
I do not say it is not useful, but I do not like that it is not a price/wage index. A unit value index can be misleading. I do not know enough (anything) about this indicator to say whether it IS misleading.
I see what you're saying. Here's a brief explanation: Unit labor cost growth = growth of compensation per hour minus growth of productivity (e.g. output per hour). Unit labor costs have slowed. Either compensation is growing more slowly than before, or productivity is growing faster than before, or both. (The time series of each is available separately, too). The underlying reasoning: businesses may tolerate compensation growth as long as they get more out of workers through better productivity. Wage growth, by itself, may not be sufficient for businesses to raise prices (due to higher wage costs), for productivity growth may lead to more output and profit. Consequently, slowing unit labor costs would, logically, imply lesser inflationary pressure, or, at least, less of a reason that businesses may raise prices.
You have asked a good question rhetorically. Do you have a positive answer? In principle the Fed folks could have access to a bigger, better model than anyone else and that's the result it spits out. But the others and the Fed publicly do not seem to be talking that way. But Summers?
Summers believes that the labor market is very tight and that inflationary pressures in it are rapidly building. It is not clear to me why he sees that. El-Erian believes that commodity-and-bottleneck risks are high. And I do not really see that either...
Does Summers know that the labor force participation has been steadily growing that the labor force has been growing at almost thrice the rate of natural increase? Increasing supply should reduce wage pressures, not increase them.
If one believes that wages have a kind of momentum that will take them past (higher than) their equilibrium wrt prices of goods and services and thereby produce unemployment, then that implies that the Fed would need to (and will?) engineer enough G&S inflation to re-establish a full employment equilibrium. Can this be Summer's view?
I guess one could ask the same kind of question about El Erian and commodities.
The big risk of higher interest rates in the US is to highly leveraged firm. I suspect that many have been able to cover higher interest costs by raising prices under the umbrella of higher inflation. Is this enough, and does it last? I don't know. Junk bond markets don't seem concerned.
But PE firms increasingly are both the borrowers and lenders for highly leveraged firms, more so than junk bonds. PE's hide from oversight, regulators, and transparency like cephalods from light. Which means that's where the systemic risk lies.
Diesel prices are way up, more than gas & oil, which will soon inflate producer prices; however lower Chinese demand for anything related to infrastructure & housing should offset in time. Regardless, Sticky CPI less food, energy, & shelter shows that this is NOT THE 1970's! https://fred.stlouisfed.org/graph/?g=18RIq
I'm still looking for empirical evidence that a strong labor market predicts future inflation. It seem more theoretical than empirical, with the huge exception of Quit Rate to Average Weekly Wages or to lagged ECI. And the Quit Rate is plummeting. I've heard businessmen say that wage inflation needs to get down to 2% or below to keep general inflation at 2%. I think this is a widespread misconception, even infecting some economists, and perhaps even FOMC members? That needs to be addressed theoretically and with historical correlations. Right that column!
I keep looking at periods of high US inflation (Revolutionary War, Civil War, WWI + pandemic, WWII, Korean War, Israeli War, Iranian Revolution, pandemic + Ukraine War), but I just can't find the common denominators. If we could get back to that zeal for a balanced budget then we could push the CPI into deflation (once shelter catches up). But this Republican House seems too incompetent to pull off anything.
You have all the main points, including on wage growth. One more supporting point, if I may, could be added: From the perspective of businesses, it is the unit labor costs that matter. Here are the data on non-farm business sector unit labor costs:
1. Year-on-year growth rates were 6%-7% in Q1-Q2:2022. That has reduced to 2.5% in Q2 2023.
2. Annualized quarterly growth rates were 6%-8.5% in Q1-Q2:2022. It was 2.2% in Q2 2023.
I do not say it is not useful, but I do not like that it is not a price/wage index. A unit value index can be misleading. I do not know enough (anything) about this indicator to say whether it IS misleading.
I see what you're saying. Here's a brief explanation: Unit labor cost growth = growth of compensation per hour minus growth of productivity (e.g. output per hour). Unit labor costs have slowed. Either compensation is growing more slowly than before, or productivity is growing faster than before, or both. (The time series of each is available separately, too). The underlying reasoning: businesses may tolerate compensation growth as long as they get more out of workers through better productivity. Wage growth, by itself, may not be sufficient for businesses to raise prices (due to higher wage costs), for productivity growth may lead to more output and profit. Consequently, slowing unit labor costs would, logically, imply lesser inflationary pressure, or, at least, less of a reason that businesses may raise prices.
Still a member of Team Transitory. Thank you for your leadership in this Sysphian task.
You have asked a good question rhetorically. Do you have a positive answer? In principle the Fed folks could have access to a bigger, better model than anyone else and that's the result it spits out. But the others and the Fed publicly do not seem to be talking that way. But Summers?
Summers believes that the labor market is very tight and that inflationary pressures in it are rapidly building. It is not clear to me why he sees that. El-Erian believes that commodity-and-bottleneck risks are high. And I do not really see that either...
Does Summers know that the labor force participation has been steadily growing that the labor force has been growing at almost thrice the rate of natural increase? Increasing supply should reduce wage pressures, not increase them.
If one believes that wages have a kind of momentum that will take them past (higher than) their equilibrium wrt prices of goods and services and thereby produce unemployment, then that implies that the Fed would need to (and will?) engineer enough G&S inflation to re-establish a full employment equilibrium. Can this be Summer's view?
I guess one could ask the same kind of question about El Erian and commodities.