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Saturday, September 26, 2020

    Prices and the Economy

    Jakob Bower
    Jakob Bower
    Jakob Bower has over ten years of business experience and resides in Muscatine with his wife, and their two children. Jakob is an active member of the Greater Muscatine Chamber of Commerce and Industry, Young Professionals Network, and theChamber Ambassador Network.

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    The Federal Open Market Committee raises or lowers interest rates to help keep inflation near a 2% target, which is the rate believed to be consistent with the Federal Reserve’s dual mandate to seek stable prices and maximum employment. According to the personal consumption expenditures (PCE) price index — the Fed’s preferred inflation gauge — core prices (excluding food and energy) rose just 1.6% year-over-year in June 2019, even though the unemployment rate was sitting near 50-year lows (3.7%).

    In the past, tight labor markets have paved the way to higher wages and inflation. The last time unemployment was close to today’s levels (3.5% in late 1969), overall inflation was running closer to 6.0% and housing costs were rising even faster.

    Low inflation may seem like good news, especially for cash-strapped consumers and retirees living on fixed incomes, but it has a darker side. Wage gains have also been weaker than expected, and lack of pricing power is often a reflection of a soft economy. When demand is tepid and/or profits suffer, companies that can’t raise prices may eventually cut spending — including payrolls — instead.

    Inflation Fighters

    A combination of structural changes in the U.S. economy and global market conditions are helping to drive down inflation:

    • Demographic Trends- Retiring baby boomers are largely being replaced with a much smaller generation of entry-level workers.
    • Rise of E-Commerce- Websites and mobile apps connect buyers to sellers regardless of proximity, increase the visible supply of available goods and services, and facilitate price comparisons so consumers can choose less-expensive options.
    • Growth Slowdown-An aging population and advanced technologies are changing how people work and spend, and these longer-term trends may continue to dampen inflation in the coming years. More recently, trade disruption and slowing U.S. and global economic activity have been causes for concern.

    On a positive note, the absence of price pressures may enable the Fed to keep interest rates low for a longer time without sparking runaway inflation. But policymakers could be surprised by the path of inflation in the coming months. For this reason, it might be wise to have a financial strategy that takes a range of economic conditions into account.

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