Inflation and Jobs and the Interest Rate

The post-Katrina job figures are out now and the 35,000 job loss isn't nearly as bad as was predicted. What has that to do with inflation?

If the economy grows faster than there are resources available, like we need 5,000 new workers to fill factory orders but only 4,000 are available, then there is competition for the resource of labor. So companies offer more money to workers to make their goods, and the Cost of Goods Sold increases, and then the price of the good sold is greater.

A lot of shortages in resources means that prices will be going up overall in the economy. That is called inflation. Traditionally, the Fed has tried to keep a lid on inflation by raising interest rates. The reasoning is that if it is more expensive to borrow money, then less people will be demanding a resource and with less demand, there will not be price competition.

The disaster of the '70's threw all of this logic in the toilet, however. A couple of reasons have been offered for this: huge influx of women in the workplace which effectively increased the number of workers in the US by a LOT in a short period of time, and the shock of rapidly increasing oil prices which affect many products and not just running our cars.

So where are we going now? Are we going to have high unemployment along with inflation? We definitely will have higher interest rates from the Fed since Greenspan is keeping a gimlet eye on employment numbers. The latest numbers show there is a lot more people working than was expected. So the resource of labor is in shorter supply than the eggheads thought. You and I might think of more people working as a good thing, but Wall Street sees ever higher interest rates and gets depressed.


The Lazy Iguana said...

I think we will see inflation with under or un employment.

There is something different about the 1970s and today. Offshore production. In the 70s, there were not 30,000 abandoned homes in Detroit. Cars were still made there. US Steel mills were not ghost factories. And so on.

As oil prices continue to climb, companies will react. Their cost of everything will increase. And no matter what, people in Colombia will work for less than people in Iowa demand.

So, how does one cut costs? Ship jobs somewhere else. If you are an airline, why hire US flight crews? Why not hire attendants from Central America? They are cheaper, and you fly there anyway.

But prices in the domestic market will continue to rise, in step with oil. Interest rates will go up to try to prevet runaway inflation. Prices go up, unemployment remains stable - or possibly even increases.

Econo-Girl said...

Yeah, underemployment and inflation. The numbers are out today and they show the highest inflation increase since 1980. Hmmm. Should make that a separate blog entry.