A Benjamin Cole post
The price of labor, in much of the developed world, is the bulk of the price of doing business. Depending on the estimate, between 60% and 70% of the cost of doing business is simply compensating employees.
While the U.S. Federal Reserve desperately sifts through data to find some reason to justify a rate hike, unit labor costs in the latest reported quarter, Q2…fell at a 1.4% annual rate.
I will cherry pick a little, but here is another fact: From Q3 2012 to Q2 2015, unit labor costs are up 1.77%—far less than 1% annually.
And indeed, from Q1 2007 to Q2 2015, a more than eight-year period, unit labor costs are up 5.91%. Again, unit labor costs are rising at less than 1% annual rates.
Fed’s 2% “Average” Target on PCE?
For the Fed to guess that inflation threatens to move above target when unit labor costs are presently falling, and have risen by less than 1% annually in the last seven years—well, I guess the Fed wants to predict inflation above target, and it will do so.
Of course, we have been below the Fed’s 2% “average” IT target continuously for more than three years. So, we “need” a couple of years above the “average” target.
So, if the Fed raises rates now, the Fed must be guessing inflation will be well above the average 2% PCE target for several years. After all, if we ran 3% inflation on the PCE for a couple of years, that would just balance results back to the putative average 2% IT.
Thus, if the Fed raises rates, it is saying the U.S. will soon be above 3% PCE inflation!
The TIPS market, btw, is predicting under 1% inflation for the next 5 years, as measured on the PCE.
Let me guess: We will see inflation and interest rates stay near zero, and sluggish economic growth.
Thanks, in large part, to Fed too-tight policies.