Last month’s 2.9 percent rise in wages from a year earlier, the biggest gain since June 2009, was heralded by some economists as a sign that inflation is finally high enough to spur more rate hikes this year.
Not so fast, says David Rosenberg, head economist and investment strategist at Gluskin Sheff & Associates Inc. in Toronto. Pricing power appears almost non-existent in the current recovery from the 2008-2009 recession.
“Here we are, about eight years into a cycle, tight labor markets and all, and the best we do is 2 percent inflation? Seriously?” he asks in a Jan. 11 report obtained by Newsmax Finance. “Strip out rents and health care, and inflation actually is zero.”
The Federal Reserve has targeted a 2 percent inflation rate as a sign of growing demand and economic health. December’s unemployment rate of 4.7 percent, which is a whisker above the nine-year low of 4.6 percent, is the other major indicator that affects the central bank’s decisions on rates.
The Fed last month raised its target rate by 0.25 percentage point, the second hike in the past 10 years. The central bank has held rates at record lows since the 2008 financial crisis triggered the worst economic meltdown since the Great Depression.
Rosenberg says he sees other signs that inflation isn’t making a comeback, including newspaper headlines about disappointing holiday sales for retailers, massive discounting by carmakers and falling prices for farm goods and energy.
“The oil price has been capped, not by any cheating from this recent OPEC-led output cut deal, but the new swing producers: U.S. shale!” Rosenberg says.
He points to the rebound in the number of U.S. oil rigs to 525 from 316 in May as an indication that stable oil prices have triggered a rebound in domestic drilling. West Texas Intermediate crude doubled from a 13-year low of $26 a barrel in February 2016 to about $52 in June, and has traded in a narrower range since then.
The U.S. dollar has risen to a 14-year high compared with foreign currencies as the Fed raised rates and investors cheered the possibility of Republican Donald Trump's pro-business presidency.
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