Here’s why the FED can’t do it alone.

Last week’s economic numbers illustrated the health of the U.S. economy.  Jobs numbers came in above expectations and except for retail the gains were widespread and indicative of a growing economic landscape.  This report, following a strong GDP number for the first quarter and a more dovish Fed stance on interest rates resonated well with markets.  All these bode well for the remainder of the year barring any political or trade surprises.  But don’t count out either of these.

Inflation remains contained despite the political undertones of a more equal distribution of wages.  Wage disparity has grown to a concerning level and should be addressed, but I have not heard any viable solution to the problem.

Normally tight job markets are a catalyst for wage increases and higher inflation.  But that hasn’t been the case for two reasons.

1. Low Unit Labor Costs
   Unit labor costs have remained unchanged over the past year.  This measure of labor costs accounts for the level of productivity in relation to the wages being paid to workers.  Higher productivity offsets higher wages and keeps inflation contained.
2. Technology
   Technology is also a key factor for keeping inflation in check.  Pricing power has abated from the goods-producing firms and only the service sector has demonstrated the ability to raise prices.  But the service sector often has lower initial capital requirements which can invite competition into markets, creating more supply and keeping prices in check. Not every firm has or can create a wide moat and technology continues to keep the environment competitive.

Low inflation is welcome for most Americans, but sub-par and stagnant wages are not.  Keeping inflation in check while helping U.S. workers get better paychecks may be something the FED can’t do on its own.

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