Only 2 Ways to Save the Economy: Innovation or Inflation

I have a new piece on the Atlantic website. It starts this way:

We have only two ways out of our current global economic mess: innovation and inflation. And as the saying goes, we should hope for the best (more innovation) and prepare for the worst (higher inflation).

Looking across the world, the underlying problem is that borrowers–households and governments–have taken on debt that they can’t afford to pay back, given the current rate of income and economic growth. In the U.S, too many homeowners are struggling with mortgages that far exceed the value of their homes and cannot be repaid from their current incomes. In Europe, Greece and perhaps other countries have issued bonds that they cannot pay back unless growth unexpectedly skyrockets.

Down the road the same principle of matching growth to debt allows us to perceive potential financial crises to come. Young male college graduates, for example, have seen their real earnings plunge by 19% since 2000, with young female college grads experiencing a similar decline. Meanwhile education borrowing has soared, suggesting that we are on the verge of a student loan crisis, where young grads simply cannot pay back their mountain of debt.

And goes on from there.  Take a look.

The Price of Wireless Service Dives

This morning’s CPI report show that the price of wireless phone service is falling at an accelerating pace. That suggests the communications sector is becoming more and more important as a driving force for growth.

Service Sector Inflation Accelerates

Is inflation accelerating or decelerating? It depends on where you look.

The inflation story differs tremendously depending on whether you look at goods or service inflation. Goods inflation is very low and stable–the producer prices for finished goods less food and energy are rising at only 1% per year. 

By comparison, service sector inflation is accelerating.   Over the last few years, the Bureau of Labor Statistics has started reporting producer prices for what it calls “traditional service industries.” These include such services as healthcare, finance, information services, legal, accounting, management consulting,  security guards, employment services, janitors, advertising, and so forth and so on.  Many of these services are mainly bought by businesses, so they don’t show up in the CPI. They also tend to be labor intensive and more domestic.

Which one of these should the Fed be watching?  I’d say that service sector inflation may turn out to be a better indicator of domestic price pressures.

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