INDICATOR: October Consumer Prices, Real Earnings and Weekly Jobless Claims
KEY DATA: CPI: 0%; Over-Year: 1.2%; Ex-Food and Energy: 0%; Over-Year: 1.6%/ Real Hourly Earnings: +0.1%; Over-Year: +3.2%/ Claims: -48,000
IN A NUTSHELL: “Despite the huge economic rebound, consumer prices remain tame.”
WHAT IT MEANS: While we were in the shutdowns and just starting to get out of them, businesses found they could raise prices and they did. But over the past two months, the pricing power seems to have faded. The Consumer Price Index went absolutely nowhere in October, and that was also true when food and energy were removed. We knew that energy costs had come down, but there were large declines in apparel, medical costs and cakes and cupcakes. Okay, the last category is not that important, except to those of us who binge on sweets. Only airline fares were up sharply.
Hourly wages increased a touch in October and with inflation flat, real (inflation-adjusted) wages rose as well. Over the year, wage gains remain solid. But it isn’t just wage gains that are the driving income growth. Workers are putting in longer hours, though that flattened out in October.
Jobless claims continued their steady decline last week, indicating that the labor market improvement continues unabated. We are approaching the 700,000 level, which is nice. However, it is way, way too high. Indeed, at the current pace, which is not likely to be sustained, it would still take about ten weeks to get back to a reasonable level of workers filing for assistance. Unfortunately, the number of people who are on longer-term unemployment keeps rising and that has kept the total number of workers receiving assistance above twenty-one million.
IMPLICATIONS: There are clear indications the economy and the labor markets remain on an upward trajectory. Unemployment claims fell once again, and the trend seems to be accelerating slightly. That is really good news. But we have a long way to go. Most importantly, the virus, is now running out of control across the nation. Some states are dipping their toes into new restrictions. When red states such as Utah and Ohio are starting to act, the situation has to be really, really, really bad. While total shutdowns as we saw in the spring are not expected, it is hard to see how the improvement in the labor markets can continue at the current pace if we keep setting records for new cases. That does not bode well for inflation, unless you want even lower inflation. Clearly, the Fed doesn’t. Some of the more traditionalists at the Fed are starting to worry, once again, about the low rates encouraging excessive risk taking. But with the Fed’s target policy of inflation running at 2% on average, it will take an awful lot of years above 2% to average things out. And we haven’t even gotten near 2% yet. As for the markets, it looks like the old motto, buy on the rumor, sell on the news is history. Now it is buy on the rumors, buy on the news. The Pfizer vaccine announcement was really welcomed, but the 90% effectiveness rate is what drove things. However, they still have to figure out how to distribute hundreds of millions of a two-dose vaccine that has to be kept at minus 94 degrees Fahrenheit. Also, Eli Lilly’s antibody drug may turn out to be even better news, at least in the short run, as it is effective and could reduce the death rate in seniors who don’t yet need hospitalization. But it too has issues as it is hard and time consuming to administer. Regardless, progress is being made on limiting the impact of COVID-19 and while we are still many months away from seeing the virus somewhat controlled, the outlook for the future is looking brighter.
Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm.
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