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Lots of words will be written about what Grandmaster Jay had to say about tapering at Jackson Hole. We’re not going to add to the chatter.
Instead, we want to draw your attention to another aspect of his speech: the chart below. The graphic shows that the cost of durables, often made abroad, has persistently fallen over the past 25 years — by an average of 1.9 per cent a year, according to Powell. At least, up until the pandemic began. Inflation in services, which are often produced domestically, meanwhile, has increased every year.
It’s a great example of the disinflationary impact of globalisation in the US and, indeed, elsewhere.
For reference, here’s what’s happened to world trade and global GDP over broadly the same period:
One part of Powell’s speech that surprised us was his confidence that global forces would remain as deflationary post pandemic: (our emphasis)
The pattern of low inflation likely reflects sustained disinflationary forces, including technology, globalisation and perhaps demographic factors, as well as a stronger and more successful commitment by central banks to maintain price stability . . .
. . . While the underlying global disinflationary factors are likely to evolve over time, there is little reason to think that they have suddenly reversed or abated. It seems more likely that they will continue to weigh on inflation as the pandemic passes into history.
This doesn’t square with what we’re hearing in trade circles. A report produced by US bank Citi and the Economist Intelligence Unit, which came out earlier this week, for instance, was full of examples of executives saying they want to diversify their supply chains, or move production closer to home. That won’t come cheap.
Of course, a lot of this is just talk. But we’re nowhere near as confident as the Fed seems to be that executives won’t at some point start putting their money where their mouth is.