The Chief Economist at research firm Sterne Agee, Lindsey M. Piegza, argues that several recent pieces of weak economic data taken together reinforce the notion that deflation (or disinflation, if you will) could be rearing its ugly head here in the U.S. He fleshes out his point of view in a January 12th report reviewed by ValueWalk.
Weak recent economic data
Piegza starts by by highlighting the mixed bag of last week’s unemployment report. The good news was nonfarm payrolls were up by 252k in December. Given an upward revision to the November report and additional revisions reported in October, that means over 860,000 jobs were created in the fourth quarter. Employment gains throughout 2014 made it the strongest year for jobs since 1999.
Unfortunately, average hourly earnings decreased by 0.2% in December after a 0.2% rise the month prior. (November’s initially reported 0.4% increase was revised to 0.2%). Wage pressures fell from 1.9% in 2013 to 1.7% in 2014, the worst annual wage growth since October 2012.
The December FOMC meeting minutes published last week noted that Committee members did not see “clear evidence of a broad-based acceleration in wages.” That said, the Committee did agree that under certain circumstances it could raise rates with inflation at or near current levels if they were confident inflation would soon reverse course towards the Fed’s longer-term target of 2%.
Piegza pointed that while some analysts took this to mean the Fed is looking to raise rates soon, he concludes “that with the Fed’s concern surrounding disinflation stemming from outside of the energy sector alone, any further signs of sluggish inflation – as implied by lackluster wages – precludes a near-term increase in rates and more likely extends the timeline for policy firming.”
Signs of a trend toward deflation?
Also of note, the retail sales report will be released on Wednesday this week, followed by the Producer Price Index and Consumer Price Index will be respectively released Thursday and Friday. The median expectation for the retail sales number is -0.1% based on Bloomberg consensus analyst data. And even with low gas prices, consumer spending has just been average. Moreover, both inflation indicators are projected to have dropped 0.4% in December, providing further concerns about deflation.