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Labor is tight, but prices are calm, contrary to what the Philips Curve describes.



Comerica Economic Weekly, October 11, 2018

October 11, 2018
By Robert A. Dye, Ph.D., Daniel Sanabria

Labor is tight, but prices are calm, contrary to what the Philips Curve describes. Trade tariffs are adding price pressure to specific products, but that is not showing up in the headline numbers. Price indexes remained calm in September indicating that inflation is well contained. 

The Producer Price Index for September showed a 0.2 percent monthly gain. Food and energy prices in the final demand index both dropped. Final demand goods less food and energy increased by 0.2 percent. Over the 12 months ending in September, the Producer Price Index for Final Demand was up by 2.6 percent, well below its peak y/y gain of 3.4 percent from last June. 

The Consumer Price Index for September gained just 0.1 percent. Consumer food prices were unchanged. Energy prices fell by 0.5 percent. We expect to see hotter energy prices in October reflecting tighter crude oil markets. Outside of food and energy, core prices also gained just 0.1 percent for the month. Over the previous 12 months the headline CPI is up by 2.3 percent, clearly past its peak y/y change of 2.9 percent from last June and July. Core CPI was up 2.2 percent in September over the previous 12 months. 

Initial claims for unemployment insurance increased by 7,000 for the week ending October 6 to hit a still-very-low 214,000. Continuing claims gained 4,000, reaching 1,660,000 for the week ending September 29, also a very low number consistent with a very tight labor market. 

Small business optimism remained strong in September. The National Federation of Independent Business’s Small Business Optimism Index eased slightly for the month, but stayed elevated near its 45 year high. Small businesses think that business conditions are good and this is a good time to expand. Sales and earnings expectations are strong. Planned price increases this summer are not outside of historical norms. Job openings are high but businesses are struggling to fill open positions. 

Total mortgage applications fell by 1.7 percent for the week ending October 5. Purchase apps were down by 1.1 percent for the week, breaking a string of five consecutive weekly gains. Refi apps fell by 2.6 percent after a small 0.1 percent loss the previous week. On a four-week moving average basis, purchase apps are up 3.4 percent from this time last year and refi apps are down by 34.8 percent. According to the Mortgage Bankers Association, the rate for a 30-year fixed rate mortgage increased to 5.05 percent. 

The Federal Reserve remains on track to keep the fed funds rate unchanged at the upcoming FOMC meeting over November 7/8. We expect to see a 25 basis point increase in the fed funds rate announced at the conclusion of the last FOMC meeting of this year over December 18/19. A December rate hike would be the fourth 25 basis point rate hike in 2018. 

We look for three more 25 basis point rate hikes in 2019. We believe that the fed will maintain their cadence of a 25 basis point interest rate hike every other FOMC meeting through mid-year 2019. They will leave the fed funds rate unchanged over January 29/30. The next rate hike looks set for March 20. With that cadence they will leave the fed funds rate range unchanged over April 30/May 1 and raise it by 25 basis points again over June 18/19.

For a PDF version of this report, click here:  Comerica Economic Weekly, October 11, 2018

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