Economic Update

Increased energy and commodity prices are fueling rising concerns about inflation. Energy and commodity costs are going up chiefly because the value of the U. S. Dollar has fallen to the lowest level since 1973. 

Compared to a standard index of international currencies, the Dollar is now worth $0.72 compared to its international value in 1973. Because the index compares with foreign currencies, the ratio takes inflation into effect and addresses only the Dollar’s value.

In other words, if the Dollar was worth the same amount as it was in 1973 (relative to other international currencies), the price of crude oil would be 28% lower than it is today.

Energy costs are having a significant impact on goods and prices. Energy costs were up “only” 7.5% in the 12 months prior to January 2011, down from a whopping 19.5% increase in the twelve months prior to January 2010. This is all without the political turmoil in the Middle East.

For most of 2008 and 2009, economists worried about deflation. Deflation results when the value of assets (buildings, equipment, etc.) go down, and can seriously erode consumer and business confidence (why hold onto something that will lose value?) Concerns about deflation are now being replaced with some initial concerns about rising inflation. Rising inflation could push up interest rates and slow the recovery for housing, but  inflation doesn’t appear to be a significant issue yet. Some inflation in the 2.5% range is considered healthy.

Labor costs were falling at 3% per year earlier but are now holding flat. Productivity increases had been decreasing labor costs, but this is no longer the case. As a result, manufacturers may be close to deciding that they need to hire more people. An economist at Comerica Bank believes that the job picture will start to improve by mid-2011 and that the number of new jobs created in 2011 will be twice the number added in 2010, or 2.5 million new jobs in 2011.

In summary, inflation remains at low levels and the fear of deflation is abating. Manufacturer and other cost data indicate that the employment outlook may finally begin to improve this summer. But, as we all know, there is a very long way to go to restore employment for the 14 million Americans now seeking jobs.