Looking on the bright side of inflation
By Stella Dawson
WASHINGTON (Reuters) - Sometimes a little bit of inflation is not such a bad thing. In the United States, prices starting to creep upward shows the deep wounds from the credit crisis are slowly healing and the U.S. economy is well on the road to recovery.
The evidence is scattered but it also shows up in some national reports. Consumer inflation, after stripping out volatile food and energy prices, has edged upward over the past year and now is running just above the Federal Reserve's 2 percent target.
Workers' pay is nudging higher as the labor market gradually improves. Hourly earnings have grown at an average annual rate of 2 percent since last May and posted a 2.1 percent gain last month, up from a 1.8 percent pace a year earlier.
Home prices in a few cities, including Miami and Phoenix, have started to climb, the latest Case-Shiller index showed, even as the overall index fell. In the Washington area, some realtors say competition has heated up, bringing multiple bids and quick sales.
Businesses in New York and small firms are reporting shortages of skilled labor, especially for technical positions. The New York ISM found in March that 20 percent of purchasing managers were having problems hiring. The National Federal of Independent Businesses said almost one third of its firms surveyed in February had few if any qualified applicants to fill vacancies. This could push up wages in these sectors.
The amount of slack in the economy also appears to be lessening, the Federal Reserve staff said in minutes last week from the March central bank meeting. When there is lots of unused capacity in the economy, price slashing is common. If demand holds up, the narrowing of the output gap could give companies some extra pricing power.
Even the most cautious Federal Reserve policymakers are taking note. "Relative to a few months ago, I think the downside risks to the U.S. economy have lessened," John Williams, San Francisco Fed Bank President, said last week. He was in the Fed camp casting the most doubt on whether the U.S. recovery had legs.
These scattered signs of pricing gains are far from enough to ring inflationary bells, and it is way too soon to say they would prompt the Fed to alter its pledge to hold interest rates exceptionally low until 2014. Indeed Deutsche Bank expects the upward tilt in consumer prices is over. Continued...