A Framework That Provides Clarity

During periods of “low visibility,” confusion reigns: for every indication of one trend, there seems to be a countertrend. The key is to glean from the collective wisdom of reliable leading indicators a clear signal that the economy is headed for a turn.

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Aug 10 2015

Productivity and Inflation: A Broken Relationship

In recent years, U.S. productivity growth has been disappointing to say the least, averaging just over ½% a year over the past four years, far below its post-World War II average.  In fact, having just experienced the biggest back-to-back quarterly declines in productivity in over two decades, one could say that the U.S. is in a “productivity recession.”
Clearly, sluggish productivity growth is a major concern. In line with their assessment of inflation dynamics in the late 1990s, the Fed now worries that “if productivity growth remained weak, the labor market might tighten more quickly and inflation might rise more rapidly than anticipated.”

With the Fed signaling a rate hike later this year, it becomes increasingly critical to understand how productivity growth relates to economic growth and inflation. In ECRI’s latest research, we update our analysis of the reasons productivity growth has been so weak, and examine its relationship with inflation, providing somewhat surprising insights into U.S. inflation pressures in the coming months.

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