Four factors have kept inflation in check, but they won’t continue to do so

During the recent recovery, four factors have kept inflation in check — the revolutions in shale oil and advanced recovery technics, non-oil commodity prices depressed by excess capacity from the overhang of the Great Recession, expanded competition from inexpensive imported manufactures and increased retail competition enabled by Internet commerce — but those mostly have run their course.

Investors are pushing smaller U.S. oil producers to finally turn profits and domestic oil prices are up, broader import prices are now rising at a 3.6 percent annual clip and stronger global growth has pushed up costs for critical items like building materials.

The housing sector is particularly squeezed. The combination of tighter building codes, higher material prices and shortages of essential skilled workers keep new home construction below prerecession levels and are boosting new home and resale prices.

Amazon and other Internet retailers have eliminated many of the weaker brick and mortar competitors, and now must squeeze better margins out of their supply chains or expand into other activities to grow. For example, Amazon is both raising prices and expanding into package delivery, drones, ocean freight and a host of other activities.

Stronger productivity growth could mitigate all these pressures on inflation.

White House economists are confident that deregulation, business investment prodded by tax cuts and deregulation will restore the lost era of strong productivity gains — those averaged 2.3 percent a year from 1947 to 2009.

Source: Peter Morici (economist, and business professor at the University of Maryland), “The optimists may be right”, op ed, The Washington Times, April 19, 2018, p. B3

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