Inflation remains close to historic lows, not just in the United States but also in other large developed markets.
Last week, we got more evidence of this with news that U.S. import prices fell 0.7% in October and are now down 2% from a year earlier. And on Wednesday, the Bureau of Labor Statistics will report October’s consumer price inflation, which is expected to fall to around 1%, a low reading even by the diminished standards of the past four years. Similarly, outside of volatile food prices, inflation in other large, developed countries is running around 1.5%, with inflation in both Europe and Japan even lower.
As I write in my new weekly commentary, there are three big reasons for the lack of developed world inflation:
1. Low wage growth. Last week, the Bureau of Labor Statistics announced that unit labor costs in the United States actually fell at a 0.6% annualized pace in the third quarter. As long as there’s considerable slack in the labor market, wage costs will remain contained.
2. Excess capacity. There is a fair amount of slack capacity in U.S. factories and utilities. Capacity utilization – how much of our factories, utilities and other capital stock is being used – remains depressed. Practically this means few factory bottlenecks and little upward pressure on prices.
3. Slow credit growth. While the Fed has expanded its balance sheet, banks have not been lending aggressively. With credit growth slow, growth in the money supply is also muted.