The Fed continues the charade of using interest rates, QE, and other monetary tools and policies to not only provide life-support and growth for the economy, but also to actually to achieve consumer inflation (as distinguished from asset inflation).
There is no way to have consumer inflation with, and the only way to have inflation is to stop, offshoring (and outsourcing).
As long as there’s a global workforce of low-cost labor in developed, and, especially, emerging markets, and, thus an infinite supply of labor, there will never be inflation, again (except due to temporary supply shocks of necessary input elements, including energy or weather-related food shortages- but food and energy prices are not measured in core inflation).
Here are 10 reasons we will, likely, have both long-term and short-term low inflation:
- Opening up of Supply Chains: As the vaccine provides a defense to the virus, we will be back to work, and supply chains will re-open and expand.
- Less Hoarding: The costs of “necessities”, like food and shelter, will not be any higher with the vaccine. If anything, the cost of these things, as hording wanes, and as supply chains open up, will decline.
- Scale: The more product a retailer or wholesalers, distributors, and suppliers order from suppliers and producers, the lower price per unit they can achieve. It’s known as “scale” and “economies of scale”, which are “disinflationary” phenomena.
- Manufacturing Costs as a Percentage of Revenues: The more a manufacturer makes of a product, the lower its per unit fixed (vs. variable) cost to produce it. As volume, at the same profit margin, rises, the fixed costs go lower as a percentage of revenues and profits (variable costs such as labor can, but won’t necessarily rise, especially where manufacturing is done overseas, and especially with automation and software driven production). Even a variable cost, such as energy, may not rise much with greater production, because we are now a net exporter and have a lot of oil.
- Switching Spending from Goods to Services: Prices of goods will go lower from consumer dollars moving to service channels.
- Services Are Labor-Based: There is plenty of slack in the labor market, and, in any event, the Phillips curve is proved nearly dead.
- Beach and Country: Rents in cities, where most of the rent pressure usually builds (and, thus, owner equivalent rents) will remain weak, as the nation spreads-out due to continued virus concerns, high taxes, crime, and available technology tools.
- Competition: Companies can only raise prices if they “have to”, or if they “can”- if competitors also do the same (such as due to a new regulation or a supply shock). Otherwise, competition and the Internet will keep prices in-check. Lowest price is still the largest objective in markets.
- Entrepreneurs: New businesses financed with private equity will be trying to compete on price in their markets.
- Health Concerns: Certain services that have seen big cut-backs in capacity (gyms and hotels) will remain slow until the vaccine “proves” itself, over time. Working-out at home and Airbnb will prevail for quite some time (in the former case, that equipment has already been bought; in the latter case, that capacity is already out there).
Nothing will cause “core” price inflation (not even transient inflation)- nothing-
except legislatively mandated onshoring and reshoring (or other market-protection laws)- which can help achieve “good” structural inflation and reinstate the business cycle; though, growth in domestic jobs and expansion of demand for domestic labor that can lead to upward wage pressures could result from a de facto onshoring policy, one arising by virtue of a significant infrastructure plan- which , by its very nature, requires domestic, as opposed to offshore, labor. A significant infrastructure plan could be inflationary for wages and commodities and transmit into general inflation.
I’m only discussing cost-push and demand-pull inflation here. Capital flows from the U.S. could cause a weaker currency and inflation. The Fed should probably let longer term rates rise … for a variety of reasons. Still, capital will not flow from the U.S. to Europe’s weak and damaged economy and low rates and yields, and China has opened the floodgates of its Yuan printing press, while forcing banks to make loans to struggling Chinese companies, and needing to maintain its exports- these factors will drive capital to the United States and dollar denominated assets.