The Federal Open Market Committee (FOMC) voted unanimously to do nothing and signal nothing at the January meeting. The committee upgraded its assessment of the economy to reflect what was most likely a strong end to 2014. That said, members also acknowledged that wage growth, inflation and the housing market remain cooler than they would like. Read More
- Premium well above long-term average:
- Illustrates bifurcation in housing market between high-& low-end buyers.
- Low-end buyers cannot drive price appreciation as much for new homes.
- High-end buyers pay top dollar for prime, turnkey, customized properties.
- Volatility in sales due to data not adjusted for seasonal factors.
Inflation cycles are just that, cycles.
The surging stagflation of the late 1980s persisted even after growth slowed; it took back-to-back recessions (which inflicted enormous pain), induced by the Federal Reserve (led by Paul Volcker at that time) to break the back of that vicious cycle. The 1990s gave us a virtuous cycle with globalization and productivity growth (most notably in computers) that allowed inflation to decelerate over the decade even as growth and wages surged.
In contrast, Japan saw two decades of deflation and stagnation that policy makers could not break because of the self-feeding nature of inflation dynamics. When prices are falling, people hesitate and wait to buy; that pushes prices even lower, which makes it deflation, a self-feeding cycle for a period of time. (When prices are rising, people buy ahead of price increases, which prompts additional price increases, until we stockpile so much that either the Fed tightens or the overhang of inventories triggers a recession.)
In the current environment, low inflation constrains pricing power which, given the ongoing slack in the labor market, allows firms to hold the line on wages, which in turn farther constrains inflation.
The Federal Reserve prefers to use the Personal Consumption Expenditures (PCE) index of inflation because PCE is more accurate; it better captures the trade-offs that consumers make when prices shift across sectors in the economy. The chart below is proof of the positive effect of plummeting oil prices in surging consumer sentiment. Low prices at at the gas pump have been a lifeline when wages have fallen short for too many households