The latest World Economic Outlook of the IMF has just been issued.

Low inflation is in the air …

Even if it looks disconnected from our daily market considerations, it has a deep impact on the overall macro and policy environment.

Inflation, unemployment and wages

Please consider the 2nd chapter of the Outlook, “Recent wage dynamics in advanced economies: drivers and implications”, or its summarized version by the IMF Blog : “The Disconnect Between Unemployment and Wages”.

 

From the blog:
(emphasis added)

“Our research in the October 2017 World Economic Outlook sheds light on the sources of subdued nominal wage growth in advanced economies since the Great Recession. Understanding the drivers of the disconnect between unemployment and wages is important not only for macroeconomic policy, but also for prospects of reducing income inequality and enhancing workers’ security.

 

The Phillips Curve, revisited

Where does the famous Phillips Curve disconnect come from according to the IMF ?
From the outlook, chapter 2:

 

“This chapter finds that the bulk of the wage slowdown can be explained by labor market slack(both headline unemployment and underutilization of labor in the form of involuntary part-time employment), inflation expectations, and trend productivity growth.”

 

“Common factors—beyond slack, productivity, and price inflation—have also exerted downward pressure on wages in recent years, suggesting that the synchronized nature of excess capacity across countries may have amplified its effects.”

 

Or from the blog :

“Our research further indicates that sluggish wage growth has occurred in a context of broader changes in the labor market. The increase in involuntary part-time employment itself, for example, is in part explained by cyclically-weak demand.

 

And – unsurprisingly – the IMF conclusion is … even more policies :

 

“Assessing the true degree of slack beyond measured headline unemployment rates will be important when judging the appropriate pace of exit from accommodative monetary policies.

 

“Wage growth is therefore unlikely to pick up until slack diminishes meaningfully—an outcome that requires continued accommodative policies to boost aggregate demand.

 

Policymakers may therefore need to enhance efforts to address the vulnerabilities that part-time workers face. Examples of possible measures include broadening minimum wage coverage where it does not currently include part-time workers; securing parity with full-time workers by extending pro-rated annual, family, and sick leave; and strengthening secondary and tertiary education to upgrade skills over the longer term.“

 

Low inflation – so what ?

 

Indeed, your preferred hypothesis behind low productivity growth, low aggregate demand and low trade activity will certainly condition your future reading of the macroeconomic environment.

 

And this corollary question left to your sagacity: if inflation remains low, why should interest rates increase ?

 

Jacques

 

A bog about finance

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