Low Inflation, Rising Jobless Claims Bring Deflation Fears to U.S.
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A mixture of low and falling inflation combined with a rise in jobless claims may indicate the United States could follow the Eurozone down a deflationary path.
According to the Cleveland Federal Reserve, the median consumer price index rose just 0.2% in January, while the trimmed-mean CPI rose 0.1% for the same period. A drop in motor fuel, which fell at a 91.5% annualized rate in January drove the low growth, followed by a 58.5% annualized fall in fuel oil.
A mixture of low and falling inflation combined with a rise in jobless claims may indicate the United States could follow the Eurozone down a deflationary path.
According to the Cleveland Federal Reserve, the median consumer price index rose just 0.2% in January, while the trimmed-mean CPI rose 0.1% for the same period. A drop in motor fuel, which fell at a 91.5% annualized rate in January drove the low growth, followed by a 58.5% annualized fall in fuel oil.
Hints of Falling Prices
Nineteen categories of goods and services saw prices decline, including fresh fruits and vegetables, medical care commodities, new vehicles, meats, and household furnishings. The wide range of falling prices across categories indicates spillage from the energy sector into other sectors of the economy.
While some economists say the fall in prices could inspire growth, as it gives consumers confidence to spend more on goods and services, there is a broader concern that businesses will be unable to drive revenue growth in this environment. In turn, a prolonged decline in prices could affect businesses’ cash flow, putting the multi-trillion dollar corporate bond market at risk. In two independent reports, investment firms UBS Group and Invesco warned that corporate debt is becoming much riskier, urging investors to offload corporate debt as rising yields and higher default risk threaten the asset class.
Jobless Claims Rise
In a separate release from the U.S. Department of Labor, weekly initial unemployment claims rose over 10% to 313,000 from the prior week, far above estimates of a modest rise in unemployment. Despite the uptick, many economists believe that a strong and improving labor market in 2014 will continue in 2015, and that wage growth is likely to occur throughout the United States after unemployment fell steadily throughout 2014.
Some American companies, most notably Walmart, have made headlines recently by voluntarily increasing their base pay for employees, even as the Federal minimum wage has not increased as acrimonious political debate on the rate continues. Many analysts suggest that an increasingly tight labor market is driving the decision.
Since companies compete for unskilled labor, an abundance of supply kept wages low from 2008 to 2014, but many analysts believe a continued fall in the labor participation rate, which has reached a generational low, as well as a fall in the unemployment rate, has forced many large firms to increase pay for entry-level workers.
That trend expects to continue throughout the year, bringing broad wage gains to workers at various levels of the economy. However, this week’s increase in initial jobless claims may indicate that there will be much greater volatility in the labor market, in turn giving many employers the opportunity to delay wage increases if the labor supply rises.
