Wednesday, August 22, 2012

Global Inflation

The world CPI inflation rate fell to 3.1% y/y in June from a recent cyclical peak of 4.9% during September 2011. Inflation was only 1.7% during June among advanced economies. With some volatility, it has been impressively subdued, at around 2% for over a decade.

While inflation is very low in the advanced economies, it is relatively high in the emerging economies, running 2-4 percentage points higher in recent years. Consumers in emerging economies tend to spend much more of their incomes on basic staples like food and fuel. Central bank liquidity has tended to boost these prices much more than the prices of goods and services that dominate the budgets of consumers in advanced economies.

The CPI inflation rate among the 30 advanced members of the OECD was only 2.0% in June. In the G7, it was even lower at 1.6%. Excluding food and energy, the former was 1.8% and the latter was 1.6%. In July, the CPI in the US was up just 1.4% y/y. Excluding food and energy, it was up 2.1%. The core inflation rate was even lower at 1.8% during June, according to the personal consumption expenditures deflator. That’s remarkable given the rebound in the CPI rent of shelter component (which accounts for 31.2% of the headline CPI and 41.1% of the core CPI) from -0.7% y/y two years ago to 2.1% during July of this year.

Why is inflation so low, especially in the advanced economies? Labor costs tend to drive inflation rates in these economies. These costs have been held down by cheap labor in emerging economies and weak global economic growth. In the US, the average hourly earnings measure of wages was up only 1.7% during July.

Technology has also been a powerful source of deflation. It is likely to continue to be so. The 8/18 NYT featured an important article titled “Skilled Work, Without the Worker.” According to the article: “A new wave of robots, far more adept than those now commonly used by automakers and other heavy manufacturers, are replacing workers around the world in both manufacturing and distribution.” The following excerpt from the story is remarkable:

“Even as Foxconn, Apple’s iPhone manufacturer, continues to build new plants and hire thousands of additional workers to make smartphones, it plans to install more than a million robots within a few years to supplement its work force in China.

“Foxconn has not disclosed how many workers will be displaced or when. But its chairman, Terry Gou, has publicly endorsed a growing use of robots. Speaking of his more than one million employees worldwide, he said in January, according to the official Xinhua news agency: ‘As human beings are also animals, to manage one million animals gives me a headache.’”

The entire article is must reading. Technological innovation has always increased standards of living. It has led to higher real incomes and more jobs for skilled workers. Now technological innovations are displacing even skilled workers. That’s obviously great for profits. The net impact on employment is an open question. There’s no question that the new robot technologies are likely to bring production back to the US from China.

Today's Morning Briefing: Inflation Still Mostly MIA. (1) Central bankers are seeking inflation. (2) Lots of liquidity. Little inflation. (3) Commodity price spikes aren’t doing it. (4) The big puzzle. (5) Why isn’t “free money” inflationary? (6) New losers and winners. (7) In US, rent inflation is rising, while wage inflation isn’t. (8) Robots replacing skilled workers. (9) Foxconn head gets a headache from his workers. (More for subscribers.)

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