The bear market in US stocks that occurred in the fourth quarter of 2018 was triggered by a fear that the Federal Reserve would keep increasing interest rates to fight off incipient inflation pressures building in the US economy. Given the incredible US jobs growth machine, spanning 100 straight months of gains and counting, better gains in wages and strong economic growth, why hasn’t inflation crept past the Fed’s stated target of 2%?
A few obvious factors are the reduced influence of unions, globalization and price transparency driven by online merchandising. The labor participation rate remains below historical norms, indicating a ready pool of workers can come back to the workforce if wages are high enough. Finally, the US has become an oil superpower and the volatility in gasoline prices is well below historical levels.
All are plausible arguments against rising prices but the cumulative momentum in the economy would have normally boosted prices well past 2% by now. Recall the Fed began to increase interest rates in earnest two years ago, taking short term rates from zero to 2 ½ % by the end of 2018. Inflation bears had long warned the Fed was behind schedule and should have started years before. But since the actual inflation data was stable and economic growth only really picked up in 2017, perhaps the Fed was truly on schedule and nipped price pressures before they found their way into the economy.
George S. Farra, CFA