A historical look at inflation & what to expect going forward...

I do not think it is an exaggeration to say history is largely a history of inflation, usually inflations engineered by governments for the gain of governments.

Friedrich August von Hayek

A 3.9% unemployment rate that could go lower. With the decline of the unemployment rate to the lowest since 2000, many are fearing that the steadily increasing demand for labor will create more wage pressure and, in turn, overall general inflation. The Fed will be watching. Since labor costs make up a large percentage of the overall costs of a firm, wages are watched very closely as an indicator of pending inflation. The Fed’s favorite inflation indicator, the PCE deflator, is still under the 2% threshold although it is gravitating toward that 2% target. But, keep your focus on unit labor costs which incorporate productivity into the calculation. Higher wages, when combined with higher productivity, help to keep prices in check because of higher output to offset those higher wages. If unit labor costs rise at 2% this year (3.5% wage increases combined with 1.5% productivity increases) there will not be as much inflation pressure as indicated by the CPI or PCE indexes. Productivity is the key. Technically speaking, we’ve been range bound in the SPX for the past twelve weeks. The range consists of the high of 2872 and some change occurring in January of this year, to the low of 2532 plus a fraction, taking place in February. The bond market is a different story. But the range bound equity market has begun to paint an ominous picture. A series of lower-highs and higher-lows over the past several weeks historically do not bode well, usually ending with a breakout to the downside. Pay attention as prices move within a tighter range and expect a change in direction as we move closer and closer to the intersection of the trend lines.

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A historical look at inflation & what to expect going forward…