To provide context, he notes:
"Bernanke may face a much different inflation vista than Greenspan did. In the
1990s, Europe, Asia, and America took turns growing strongly, so we never had a
pervasive global push on prices, says Lakshman Achuthan, managing director of
the Economic Cycle Research Institute. Now the world’s largest economies have
all been expanding for several years, which is pushing up prices for
commodities. (Hello, inflation!)
If lower productivity and higher inflation amplify each other – as higher
productivity and lower inflation did in the 1990s – we face the risk of a
bizarro virtuous circle, says Achuthan: a vicious reinforcement, in which lower
productivity drives inflation higher, which in turn drives productivity lower."
Now for the moneyshot: Gross asks How concerning should this be to the Fed? The answer is found in the two most recent FOMC’s communiqués. The June 29 statement contained this sentence:
"Ongoing productivity gains have held down the rise in unit labor costs, and
inflation expectations remain contained."
In the Aug. 8 missive, that reassuring statement was nowhere to be found. Indeed, it was glaring in its omission. And that suggests that the data dependent Fed will be paying close attention to upcoming productivity data. And, the most recent productivity release showed unit labor costs rose 4.2 percent
in the second quarter of 2006, up from 2.5 percent in the first quarter.
This suggests the labor component of upcoming inflation data will be rather higher than many investors are expecting.
UPDATE August 22, 2006 1:30pm
As if on cue, Chicago Federal Reserve Bank President Michael Moskow said policy
makers might need to raise interest rates further to fight inflation. Earlier in the day, Atlanta Federal Reserve
Bank president Jack Guynn said in a speech in Atlanta that while he’s confident that inflation will
be well contained, central bankers need to be cautious about "the slippery slope
of trading inflation for growth."
Productivity watch: The nirvana of high growth and low inflation may be over
Fortune, August 22 2006: 5:35 AM EDT