Really Looking For Inflation, Part 1

Most people have been looking at Jerome Powell’s Chairmanship of the Federal Reserve as continuity, a comprehensive extension of Janet Yellen’s (and therefore Bernanke’s). This would by nature include all the nasty habits Chairman Yellen had picked up during her one term. At the top of that list is the word “transitory”, particularly how it came to be used during her tenure in a manner wholly inconsistent with its meaning.

This expression she applied mostly to inflation, or as if somehow a valid excuse for the central bank missing its inflation target (mandate) for the last half of Bernanke’s second term as well as the entirety of her own. Six years cannot fall inside the definition of transitory. But when you have no other alternate theory?

At his Humphrey-Hawkins mandated testimony last month, Jerome Powell briefly mentioned the other undershoot. This one happens to be the very factor that policymakers are counting on for transitory to end. Alongside a great many economic problems, worker wage rates have remained stagnant in nominal terms, and atrocious in real terms even with low calculated inflation.

Powell, however, is upbeat (when is he not?) Wages, he told Congress, “should increase at a faster pace as well,” for one because inflation has been “as likely reflecting transitory influences that we do not expect will repeat.’’ Weak wages are transitory, too?

That’s some continuity Yellen to Powell, as was the acknowledgement of productivity problems. Holding back the American workforce is the lack of investment on the so-called supply side (capex). To that end, linking low productivity growth to this continued weak wage environment, the new Chairman was encouraged by the recent tax law changes which he believes “should support higher productivity growth in time.” In other words, transitory there, too.

And yet, there isn’t one sign any of that is true. There is instead every bit of evidence suggesting, strongly, nothing has changed. If you want to believe that the last tax bill will be the reason all these factors will suddenly turn positive, then you first have to explain why the last two or three failed to do exactly that (and the ARRA included far more purported incentives and benefits, and companies refused the invitations anyway).