Clive Crook, like many others, subscribes to the “cost-push” theory of inflation:
In the U.S., these forms of disguised unemployment add maybe two percentage points to labor-market slack. (In addition, even though output is rising, labor productivity remains lower than you’d expect, implying that some companies may have retained more labor than they need at current levels of demand — a third kind of disguised unemployment.) Add this to the one percentage point suggested by the gap between measured and equilibrium unemployment, and you have plenty of room for labor demand to rise without causing inflation. The corresponding figures for the U.K. are similar.
Inflation will not be forthcoming while spending growth remains low and stable, and in a Depressed/”Great Stagnation”/”New Normal” economy (brought to you by the Fed) the unemployment rate is not a very good indicator of labor market “slack” anyway.
Update: Another “cost-push” view this time from Martin Feldstein:
Recent research also indicates that increases in demand that would cause a further reduction in the current unemployment rate would boost the inflation rate. An important study co-authored by Alan Krueger of Princeton University, who served as Chairman of President Obama’s Council of Economic Advisers until last year, showed that the inflation rate reflects the level of short-term unemployment (lasting less than six months), rather than the overall unemployment rate. Longer-term unemployment implies a waste of potential output and a source of personal suffering, but it does not have an impact on the rate of inflation.
Krueger’s analysis indicates that the rate of inflation begins to increase when the short-term unemployment rate falls to 4-4.5%. With short-term unemployment currently at 4.2%, the inflation rate is indeed rising, and Krueger’s research suggests that it will increase further in the months ahead.
Similar studies by Robert Gordon of Northwestern University and by Glenn Rudebusch and John Williams of the San Francisco Federal Reserve Bank point to the same conclusion about the role of short-term unemployment and the irrelevance of long-term unemployment in the inflation process. While not all researchers agree with this analysis, I think the evidence is strong enough to represent a warning to the Fed and to market participants.
Indeed, I would not be surprised by a continued rise in the inflation rate in 2015. In that case, the Fed is likely to raise the federal funds rate more rapidly and to a higher year-end level than its recent statements imply.
The comforting thing is that MF has been consistently wrong on inflation for the past 5 years!
For example: From 2009 – “Inflation Is Looming On America’s Horizon”