So, Where Is It?

The Fed in its Beige Book as well as in the speeches of several of its officials has referenced a labor shortage for years now. On the one hand, that is understandable given the trajectory of the unemployment rate. All the way back in 2013, during the so-called taper tantrum, it was the rapid drop in that rate which triggered (supposedly) the violent reaction. Because it had fallen much faster than anticipated even by those otherwise permanently optimistic, there was, we were told, no choice for the FOMC other than to speed up their planned exit program.

The intended sequence of events is easily established; the end of slack, the increase in wages, businesses passing along those cost inputs to consumers, and workers who can afford the price increases because of rising wages and aggregate labor income (recovery). During that process, the central bank’s central task is to make sure it doesn’t get out of hand. Like some sort of twisted referee, Economics doesn’t like it when things become too good for workers.

As easy as it sounds in theory, in practice it is near impossible. There are any number of problems starting with measurements and statistics. Even if those could be more understandably overcome, there is left the non-trivial detail that in truth nobody really knows how these things work. We have a rough idea of some basic causes and effects, but the complex interplay between so many variables is beyond any current human capabilities.

Holding fast to that expected process anyway, the Federal Reserve has tried repeatedly to gauge where in it the US economy falls. As noted above, given that they have been talking about the low unemployment rate as well as a labor shortage for years it’s safe to conclude they really have no idea.

In the past, that’s not how it ever went. When inflation came on, it came on. There was no meandering nor questions about this or that. Consumer prices started to rise, and then they rose some more, and some more, and then spiraled from there (or triggered a true inflationary peak, meaning recession). The media keeps talking as if this was the case today, except there has been but one acceleration in the CPI (or PCE Deflator) attributable entirely to the rise of oil prices from the ugly lows of the “rising dollar” downturn.