U.S. Headed for Stagflation
There are growing job openings and a mismatch of needed skills, falling new weekly claims for unemployment insurance and rising voluntary quits. Besides the tight labor market, for the past five years, firms have been unwilling to reinvest in themselves, choosing instead to hoard large volumes of cash.
As a result, capacity issues could constrain the rate of expansion of real physical output. David Rosenberg, of Gluskin-Sheff, indicates that he believes that noninflationary potential economic growth in the U.S. is between 1% and 2%, as opposed to the 4% view held by those who control economic policies. If correct, the U.S. is currently at or even above its noninflationary growth rate.
The Inflation Recognition Problem
Furthermore, due to the adoption of twisted logic that now welcomes inflation, early warning signs are likely to either be ignored or praised. Inflation is a lagging indicator, which compounds the recognition problem. Over the past year, while the core inflation rate in goods (CPI) has been -0.2%, the inflation in the dominant service sector has been 2.3%. We should recognize that there are measurement issues that bias these inflation measures to the downside.
One logical conclusion for the U.S. is that current monetary and fiscal policies, which are aimed at demand stimulation rather than supply-side capacity issues, could result in today's Brazilian style stagflation.
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