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Inflation making a comeback, economist says

Human Resources
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Inflation in the United States may be making an appearance in the national economic picture, according to an Upstate economist.

Bruce Yandle, dean emeritus and alumni professor of economics at Clemson University as well as adjunct professor of economics for the Mercatus Center at George Mason University, said the market seems poised to bring inflation back after a brief hiatus.

In his Economic Situation report, Yandle said after the addition of 227,000 new jobs in January, coupled with a 2.5% year-over-year growth in wages, “inflation seems to be back in the game.”

He said that an increase in wages is not the lone factor in determining inflation. The wage increases are more of a reflection of “growing scarcity of skilled workers backed by growth in the amount of circulating money that fuels economic activity” but there are other factors that have led to speculation that inflation is coming back.

“After all, the term inflation itself refers to inflating the supply of money in the economy,” Yandle wrote. “Bank lending, the source of new money entering the economy, is on the rise. The banking system’s massive capability for making more loans, based on having ample reserves on deposit with the Federal Reserve, tells us that more money — and more inflation — is on the way.”

Yandle said that even with low labor participation rates that may not necessarily mean more people just waiting for work but that they are employed, “just not in officially documented ways.”

“Evidence of growth of the underground economy provided by the per capita count of $100 bills in circulation supports the notion that the cash economy is booming,” Yandle wrote. “Coupling the unknown count of shadow economy workers with more than 8 million now drawing Social Security Disability benefits — up 1.7 million since 2007 — yields a very different labor participation story.”

And, because the Federal Reserve may raise interest rates three times over the year — the Fed raised benchmark rates in March — the potential for inflation is higher, Yandle said.

Regionally, the Southeast continued to show strong gross domestic product growth year-over-year through the second quarter of 2016. According to the Bureau of Economic Analysis, Georgia (+5.6%), Florida (+4.9%) and South Carolina (+4.8%) were among the nation’s leaders for GDP increase. Oregon (+6%) and Washington (+5.8%) led the nation in GDP growth from the second quarter of 2015 to the second quarter of 2016.

Negative growth was experienced in energy-producing states like North Dakota (-9.9%), Wyoming (-8.8%), Oklahoma (-4%), West Virginia (-3.6%), New Mexico (-1.9%), Louisiana (-1.2%) and Texas (-0.8%).

“Slow GDP growth can be the result of falling prices for energy products such as natural gas and oil and by complete shutdown of production, as has happened with coal in a number of locations,” Yandle wrote.

During the fourth quarter of 2016, the national economy grew by 1.9% which was a 3.5% decline from the third quarter. In their growth report, Patrick McLaughlin and Jonathan Nelson — both with the Mercatus Center — said GDP growth may be spurred ahead in the future if national policy halts the expansion of regulations. Their report found that regulations on the federal level in the United States have tripled since 1970.

According to data from the Mercatus Center, the number of regulatory restrictions was 402,928 in 1970 and grew to 1,078,631 as of the end of 2016 — an increase of 168%.

“Long-run growth depends on innovation — a catch-all term that means not only new inventions like smartphones and driverless cars but also many changes in business practices or technology that increase productivity,” the report said. “The build-up of regulations distorts business investments, forcing some capital to be used for regulatory compliance and arguably deterring many companies from investing in new product development or business expansion plans altogether.”

Recent policy suggestions have included removing two regulations for every one new regulation enacted. Additionally, the “savings from changes to existing regulations must at least equal the costs of the new regulation,” according to McLaughlin and Nelson. Their report suggests looking at regulations dynamically rather than based on cost estimations.

“Dynamic scoring of legislation that would decrease income tax rates takes into account the changes to behavior at the margin, where some individuals may have previously elected not to work more in order to remain below a threshold that would increase their income taxes more than take-home pay from putting in those extra hours,” the report said. “Similarly, regulations have dynamic effects, which helps explain why policymakers are focused on regulatory reform of late.” 

Reach Matthew Clark at 864-720-1222.

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