Six years ago, due to robust job creation in the U.S. economy and based on the historical accuracy of the Phillips curve, I predicted that inflation would rise and commodity prices increase in value. But I was wrong.
Two years ago, I stated the very same thing and was wrong once again. And I said all that a year ago and was wrong again.
The Phillips curve, according to Wikipedia, “describes a historical inverse relationship between rates of unemployment and corresponding rates of rises in wages that result within an economy.”
In other words, when the jobless rate is low, there is a tendency for inflation to increase, and vice versa. Wikipedia goes on to state, “the Phillips curve remains the primary framework for understanding and forecasting inflation used in central banks.”
Last week, the Labor Department released the April Employment Report. Job creation was robust as the jobless rate fell to a 50-year low. The inflation rate was 1.6% and below Fed expectations.
Based on robust job creation and in light of the historical accuracy of the Phillips curve, I am predicting that inflation will rise and commodity prices soon to increase in value due to inflationary pressures.
However, there is a growing conviction that the Phillips curve is out of date and no longer a useful measure to predict inflation. The New York Times, following the release of the April jobs report, stated, “Maybe using data from a few decades in the middle of the 20th century to set policy in the 21st isn’t such a good idea.”
The New York Times may be right. On the other hand, the Federal Reserve recently tweaked ever so slightly its take on inflation. That subtle tweak needs to be looked at carefully to gauge if inflation is about to rise based on robust job creation.
From CNBC News: “Fed Chairman Jerome Powell described low inflation as likely ‘transitory,’ not ‘persistent.’” And there you have the subtle tweak. The Fed changed one word about inflation and nothing else.
At a news briefing following the Fed’s two day meeting and subtle tweak, Powell stated, “We suspect transitory factors may be at work,” and “inflation should return to the Fed’s target over time…”
And that is the reason the Fed decided not to hike or lower rates at this time. The Fed has chosen to sit tight on monetary policy because inflation pressures are no longer “persistent” so much as “transitory.”
James Carville coined the phrase, “It’s the economy stupid” back in the successful 1992 presidential campaign of Bill Clinton against President George H.W Bush.
Carville hung up a sign in the headquarters of the Clinton campaign in Little Rock, Arkansas, with that very phrase and it became a de facto slogan for the Clinton election campaign. And, of course, Clinton won the election and the phrase became part of history.
The Washington Post, following the April jobs report, stated, “The latest piece of good news comes accompanied by strong wage growth, hot stock markets and a first-quarter growth report last week that smashed expectations. Equally noteworthy is what economists aren’t seeing: the high levels of inflation that have accompanied previous expansions.”
There is no doubt the economy is far stronger than most expected with the jobless rate at a 50-year low. And most economists struggle to explain how inflationary pressures can be so muted in consideration of the Phillips curve.
Many are embracing the idea put forth by the New York Times when it stated, “Maybe using data from a few decades in the middle of the 20th century to set policy in the 21st isn’t such a good idea.”
However, I am not in the camp so eager to discard the Phillips curve that has proven to be an excellent gauge of inflation down through history.
I am willing to bet that sooner than later, market historians will look back upon the subject of inflation in mid-2019 and realize it was a turning point with the Fed hinting loudly by a subtle tweak that involved changing only one word in monetary policy that inflationary pressures were about to increase.
Soon, historians will argue the Fed actually hinted that inflation was about to rise. As proof, they will be quick to point out the Fed hint was loud and clear. They will scream, “It was the tweak, stupid. It was the tweak.”
Those looking for the history of the futures markets from 1990 to 2015 should check out commodityinsite.com.