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An Examination of the Validity of Fears of Inflation in the United States
- Raising of Interest Rates Unlikely to Accelerate -

April 26, 2005


This article examines the validity of the fears of inflation in the United States that have been growing in recent months and considers the future of US monetary policy.

Core consumer prices in the United States remain low and stable. The future trend of inflation depends on whether or not unit labor costs, which have recently begun to show signs of rising, see a sharp increase.

Given the high rate of growth of labor productivity and the tendency of the corporate sector to curb labor costs, it is likely that pressure to raise wages will be kept down for some time. The high labor productivity is due to rising equipment ratios in IT capital and it is unlikely that its rate of increase will slow to any major extent. There is a growing tendency to adjust employment in a flexible manner, in response to the fluctuation of corporate profit ratios, and ongoing globalization exerts a constant downward pressure on the labor share.

Moreover, the United States still has a GDP gap of around 1.3%. As to the balance of labor supply and demand, although unemployment is ostensibly falling, this is largely due to a decline in the labor force participation rate and in real terms unemployment remains high, running at 6-7%. Pressure for wage inflation seems unlikely to rise in the immediate future.

The Fed can afford to maintain its stance of raising interest rates at a "measured pace" for some time, and if the economic deceleration becomes more pronounced, may change its policy stance and briefly suspend the raising of interest rates until the economy begins to recover once more.

For more information on the content of this report, please contact: Takeshi Makita, the Japan Research Institute, Limited.

Tel: :03-3288-4244

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