Recent stock market volatility was partly blamed on fear that inflation will soon “take off.” Simple supply and demand arguments would suggest that pressure on resource markets (labor mostly, but also raw materials) would lead inflation higher. Many of us old-timers remember the Great Inflation of the 1970s and early 1980s. However, such fears are overblown – at least for the foreseeable future. Still, there are plenty of other things for market participants to worry about.
Retail sales results for January were weaker than expected and figures for November and December were revised a bit lower. None of that should be too worrisome. Seasonal adjustment can be tricky, but adjusted retail sales figures normally move in fits and starts. A moderate slowdown in consumer spending growth would not be unusual following a strong 4Q17 (which partly reflected a rebound from a soft 3Q17). Similarly, industrial production was softer than expected in January, but that followed a strong showing in the fourth quarter (which also reflected a rebound from a soft 3Q17).
The inflation of the 1970s and 1980s is typically blamed on the oil shocks. However, the mechanism driving inflation was different than it is now. The government began indexing Social Security to the Consumer Price Index in the early 1970s. The unions saw that as a great idea and many incorporated it in their labor contracts. So, a sharp rise in oil prices boosted the CPI, which lifted union wages, and non-union wages followed. Inflation became embedded in the labor market. You needed a recession in the early 1980s to wring inflation expectations out of the system. Over 25% of private-sector jobs were union jobs in the early 1970s. We had 424 work stoppages in 1974 and averaged 289 per year in the 1970s. In 2017, 6.5% of private- sector jobs were union. We had seven work stoppages last year, the second lowest on record (we had five in 2009).