Economics: Should We Worry About Inflation?

(Drivebycuriosity) - The Fed is hiking her interest rates to constrain inflation and to keep the rate of price increase close to her target of 2% annually. Goldman Sachs suspects that inflation may soon overshoot this target (goldman). The bank surmises that the economy might overheat, partly because of a tightening labor market (falling jobless rates) which will foster wage growth. Goldman Sachs warned "that with the labor market continuing to tighten, inflation will likely push notably, not just slightly, higher.

I doubt that this so-called "labor-inflation" will happen. I agree that wage growth may accelerate in the coming months, thanks to the strengthening job market, but this will get - at least partly - compensated by automation. The technological progress is keeping inflation at bay.  Computers and other electronics have been getting cheaper all the time. Many industries compensate rising labor costs by automation - at least partly.

Take for instance Amazon. Recently they raised their minimum wage to $15 per hour, but they also announced that they will hire fewer temporal workers for their Christmas season even though they still expect growing sales. They can do this because they are using more and more robots, which are assisting the workers, making them more productive. This is part of a long term trend: Automation is raising productivity - output per capita - which allows rising wages.

Since going online Amazon has been been obsessed with efficiency, cost cutting and delivering goods cheap, fast & reliably. They have been constructing a network of huge fulfillment centers which are very efficient and save a lot of costs. Customers spend muss less money & time when they get things delivered at home. Amazon`s rapid growth forces competitors like Walmart & Target to act similarly and to become more efficient & to curb their prices as well (Amazon Effect). Today Jet.com, owned by Walmart, and many other e-commerce companies are competing with Amazon which forces them all to sell at low prices.  Even Google & Facebook are participating in the battle for the online customer. As a result everything what can be ordered online is relatively cheap and prices for many goods are falling. This way the Amazon effect is keeping a lid on inflation by partly compensating the rising costs for services like health care & for the climbing rents.

The recent rise of the inflation rate was mainly caused by the jump of the oil price and energy costs tripled since 2016. Climbing energy prices even hiked the so-called core inflation rate (without food & energy) because rising transportation cost raise the prices for food, furniture, building materials and many more goods. Fortunately in the recent weeks oil prices dropped about 20% because of the rising US oil production, thanks to fracking (chart above ). It seems that the US oil production is keeping the price of oil and so the oil inflation at bay.

The Federal Reserve is already fighting against inflation. They hiked their interest rates 8-times and announced more hikes to come. I assume the a more restrictive Fed policy, the Amazon effect & climbing oil production will keep a lid on inflation. Don`t worry inflation.