Charlie McElligott of Nomura, Nomura, said last week that the fate of the rally, or lack thereof, depends on two main things: where is the dollar going from here, and what happens to inflation?.
And while the dollar is steadily declining to fall despite – or rather despite – Wall Street's par excellence trade for 2019 being a weaker dollar now that the Fed has reversed, the most important problem is that of unemployment rate lower than most estimates of full employment in recent years, why is inflation still below target?
Needless to say, with the FOMC now stressing that "moderate inflationary pressures" were a reason to stay patient, this issue has become more important, especially as asset prices have shown increased sensitivity to inflationary peaks.
However, according to Goldman, the main answer is that "there's just not a puzzle to start with" and in a note from the bank's chief economist, Jan Hatzius writes that "The Phillips curve has flattened over the decades to the point where an unemployment rate of 1 pc lower than the full employment rate tends to drive up inflation from just 0.1 to 0.2 pp. With an unemployment rate lower by about ½ pp to our estimate of full employment, the state of the labor market alone implies that inflation should tenth above the 2% target or two-tenths above the current rate of 1.9% of the core PCE inflation rate. "
As the bank shows in the table below, the category of health care services – which represents about 19% of the core population – is the main reason why inflation has been a little more moderate than the pre-recession average. The left-hand panel shows that health service inflation was in line with the broader pre-recession inflation, but it is now much more moderate, at least according to the hedonically adjusted measure by BLS and if Health care inflation is actually as low in the "real". world "is a totally different issue, while the prices of other basic services and basic goods have risen at roughly normal rates.
Assuming that the BLS measurement is accurate, Goldman then notes that much of the protracted weakness of healthcare services inflation over the last few years reflects the direct and indirect effects of the legislation and sectoral trends. And although at this stage, the direct effects of the Affordable Care Act (ACA) on publicly paid health care costs are likely to be behind us – which would have the effect of lowering health care costs. even though many Americans have a totally different conception of what Obamacare did for their health care expenses – the sequels persisted in many ways.
And since the Fed only cares about what the BEA reports in its main PCE and all the "real world" anecdotes are immediately rejected, the fact that, according to the "empirical" analysis, the main Persistent low inflation is Obamacare, on both readings of inflation and the Fed's monetary policy, which is why taking Goldman is really important.
And speaking of Goldman's taking, Hatzius writes that, according to the bank's estimates, The health insurance cuts imposed by ACA continue to have significant disinflationary impacts on private sector prices, as shown in the chart below.
In addition, Goldman says that the ACA and other ongoing cuts in government reimbursement rates would have apparently heightened the focus on cost discipline and disinflation efficiency gains, adding that "these effects can not last forever, but they have been a persistent disinflationary force in recent years and are likely to fade only gradually." Needless to say, this "analysis" is laughable in the light of unprecedented drug prices observed in recent years, which, if they are a topic of crucial political discussion for years, never trigger an inflation pattern.
At the same time, outside the health care sector, Goldman says that the other components of the main PCE index, which generally follow a cyclical pattern, have accelerated almost as they should. In fact, according to an analysis by the bank's economists, inflation in these categories is only slightly below the expected level. Exhibit 3 illustrates this by resizing the chart axes according to the results of the regression.
So, how is it that, while asset price inflation is rampant, while many openly announce the opening of a new asset bubble, price increases in the real economy are so weak that they allow the Fed to remain "patient" indefinitely, perpetuating the stock market bubble?
Goldman's findings above reinforce what previous research on inflation has also revealed.
- First, the Phillips curve is alive but flatter, which means that lax changes now have more moderate effects on inflation.
- Secondly, non-cyclical factors – changes in health care policy and downward changes to new taxes or tariffs – can have relatively large effects on inflation.
But this is the third observation of Goldman is the most surprising because, according to economists of the bank, the first two results "insist that the puzzle of inflation is exaggerated – inflation is simply not an indicator as reliable as cyclical. As former Fed President Janet Yellen said, "such" surprises "should not be really surprising. "
That, for want of a better word, is idiot Considering that unemployment is largely meaningless and that only inflation is the determining factor in the Fed's monetary policy, Goldman said that "inflation is simply not reliable as a cyclical indicator " when that is the only thing This means that the Fed is now counting on an overtly broken indicator to adjust the cost of money and that, at the same time, it is blowing up even bigger asset bubbles. even though the "unreliable" inflation indicator, inflation, continues to be depressed for purely political reasons.
In any event, Goldman concludes that his findings also shed light on the inflation outlook for 2019 and notes that "disinflationary pressures on healthcare-related inflation, which largely account for the remaining weakness, should somewhat lessen, while cyclical pressures normally work should intensify somewhat. "
Core inflation should rise from just below 2% to a slightly higher level, which is not a radical change, but is likely to influence policy makers in favor of higher interest rates. later this year.
Unless of course that does not happen and that "later this year" Goldman is forced to write another essay explaining why "inflation is simply not as reliable a cyclical indicator" even if the Fed is clearly delighted to use it as a cyclical indicator. if that means continuing to blow up the biggest asset bubble in history.