Price wars in wireless phone charges pulled core inflation down spectacularly in the US last month. It is a classic illustration of how intense competition has driven the NAIRU lower. In this case, telecom providers are battling over unlimited data plans to generate subscriber growth. The advent of 5G will only increase the potential for these companies to provide more, for less. 5G will cut inflation too.
Ms Yellen reiterated last Monday her determination to hike again in the summer. Removing the asymmetric bias in current monetary policy is the FOMC’s primary motivation for raising rates this year. Moderate growth is enough for the Fed to take back some of the extreme cuts that followed the 2008 crisis.
Nevertheless, Friday’s inflation numbers were symptomatic of a big shift underway in the US economy. The pace of innovation has intensified in the past year-and-a-half. There will be other sectors where tech disruption and cost cutting will pull inflation down. Margins are not being squeezed in every case: some sectors are suffering, but BEA data shows total cash earnings are rising. Lower costs are simply being passed on to the consumer, stimulating growth. That is ultimately good for equities. Geopolitical risks are a concern, but the persistence of low inflation suggests the current economic upswing will endure. It also points to a further flattening of the Treasury yield curve.
Summary
- Wireless companies in turf battle: cable companies entering the fray
- NAIRU far below Fed’s estimate, curve flattening to continue
- Equities unnerved by North Korea/US standoff. But low inflation is a big positive
