Inflation or Disinflation?

Inflation or Disinflation??
Published: Thursday, 3 Feb 2011 | 11:15 AM ET Text Size
By: Patti Domm
CNBC Executive Editor

Labor costs are often cited as a reason why the U.S. is not heading into an inflationary period, even as commodities prices continue to soar.

Today's report on productivity and labor costs showed that the American workforce was more productive in the fourth quarter, but it also showed continued downward pressure on wages.

Employee output per hour rose at a 2.6 percent annual rate, but labor expenses, expected to rise, fell 0.6 percent quarter-over-quarter. Economists, when measuring inflation, look at the smoother, year-over-year trend which shows a 0.2 percent decline in labor costs.

Credit Suisse economist Jonathan Basile pointed out the case against inflation in a note today.

"The YoY (year-over-year) trend in labor costs continued to point in a disinflationary direction as opposed to an inflationary one. The 0.2 percent rate in Q4 was a record eighth straight negative quarter—the weakest sustained stretch in the postwar period. Labor costs make up the biggest chunk of business costs and are a reliable indicator for core inflation."

Basile, in an interview, said that until the employment situation changes, inflation is not a threat in the U.S. "What generates inflation is when people go out and find a better paying job and that's not here. There's still an awful lot of people unemployed and underemployed," he said. He expects the unemployment rate to remain at 9.4 percent when the government reports January's employment data Friday. He also expects to see an increase of 135,000 in non farm payrolls.

Meanwhile, the United Nations Thursday reported that world food prices hit another record high in January, and catastrophic weather around the world will continue to pressure prices and supply.

The job market is starting to really heat up in my industry - at least at the "professional" level. I'm even considering making a move myself. As I said before, companies had been low balling salaries (including mine).