In a front page article, the WSJ takes aim at the “biggest market puzzle” of our times: the bizarre disconnect between growth and inflation, where on one hand government reports of strong, coordinated, global economic growth and tumbling unemployment (at least in the US and Japan) are offset by the complete lack of concurrent reflation. Some examples:
The U. S. economy grew 3% in Q2, but in July CPI was up only 1.7% from the prior year; Eurozone inflation, similarly, remains stuck at 1.5% despite the bloc’s accelerated recovery. Japan’s economy grew 4% in the same quarter – its longest expansion streak since 2006 – yet inflation has failed to move above zero, where it has been stuck for the past two decades. Aside from the now widely accepted reality that the Phillips curve is now broken…
… and the all too real possibility that either growth or inflation is being measured – and reported – incorrectly, whether accidentally or for political or market manipulation purposes, this disconnect suggests that something is very wrong with conventional economic theory: after all “when growth is strong, people demand more products and companies need to offer better pay to hire more workers, and so prices go up.” And, as the WSJ points out, if this relationship is indeed broken, “the consequences are vast for economic policy-making and financial markets.”
This post was published at Zero Hedge on Sep 6, 2017.
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