US inflation mystery persists
Drugstores fear sector shakeup by Amazon
THE moribund inflation seen in the world’s largest economy over the last year is a “mystery”, a “surprise” and a “concern” all at once, in the words of US central bank chief Janet Yellen.
And the dilemma – why price pressures have not picked up despite nearly a decade’s worth of falling unemployment and growth – will be squarely at the fore when Federal Reserve policymakers gather on Tuesday for a twoday meeting in Washington.
If futures markets are to be believed, the Fed will take no action on benchmark interest rates at the meeting, leaving the target range unchanged at between one percent and 1.25 percent.
But it expects to adopt a rate hike in December, its third of the year, to ward off inflation that perpetually seems to be just around the corner.
Hovering over the Fed’s deliberations will be President Donald Trump’s decision, also due this week, on whether to replace Yellen, whose term as chair expires in February. But on Wednesday all eyes will be looking for clues about what the Fed will do next.
And the camp that favours a rate increase likely got a boost on Friday when official figures showed the US economy beat expectations, growing at a 3 percent clip in the third quarter despite the pounding taken by the commercial and industrial hubs battered by Hurricanes Irma and Harvey.
But after the Fed’s most recent meeting, Yellen acknowledged that growth and job creation had not produced the inflation that long-prized economic models say it should, leaving central bankers in an increasingly uncomfortable quandary.
“It was pretty understandable until this year,” Yellen told reporters. “But this year, it’s been a surprise.”
According to Yellen, she and most of her colleagues on the Federal Open Market Committee, which sets US monetary policy, now “guess” that inflation will begin rising next year and hit their 2 percent target by 2019.
But an increasingly vocal minority on the committee say this expectation looks less like sound forecasting based on hard numbers and more like an untested article of faith.
The Commerce Department today is due to release a new batch of closely watched inflation figures but whatever the outcome it is unlikely to change the overall picture so far.
The ‘gig economy’ and wages
The “core” measure of the Fed’s preferred gauge of inflation, which strips out volatile food and energy prices from the Personal Consumption Expenditures price index, has been below the central bank’s two percent target for more than five years.
As of Friday it was at a rock-bottom 1.3 percent. Meanwhile, the core Consumer Price Index fell below the same target earlier this year to 1.7 percent and has not budged for five months in a row. The Fed’s “Beige Book” survey said this month that wage pressures were scant despite a “widespread” labour shortage.
Joseph Gagnon, a former Fed official now at the Peterson Institute for International Economics, said the circumstances did not point to a rate hike.
“I do wonder what they’re thinking,” he said.
“If they rely too much on their models and not enough on their data, it could be a mistake.”
The Fed has dismissed this year’s low inflation as the result of one-off factors like falling drug prices and mobile telephone costs. But advanced economies across the world are in a similar state, suggesting the Fed’s “transitory” factors may be beside the point.
The so-called “doves”, who favour waiting to raise rates, say inflation is low in large part because jobs markets are not as healthy as they seem.
Research from the International Monetary Fund published recently shows part-time and temporary employment, otherwise known as the “gig economy”, accounted for much of the recovery in job creation since the 2008 Great Recession – holding down wages and inflation as a result.
Traditional measures of “slack”, or the level of unused labor on the market, may not accurately measure the amount of under-employment – allowing unemployment data to fall while inflation remains tame.
“The low wage inflation to us is just the proof in the pudding that there’s a lot of labor market slack,” said Josh Bivens, research director at the leftleaning Economic Policy Institute.
“To me, you just have to believe the data. We’re not there.” SHARES of CVS Health tumbled on Friday with other drugstore chains following a report it could acquire insurer Aetna to fortify itself against a possible Amazon entry into the sector.
CVS Health has offered to buy Aetna for more than $200 per share, the Wall Street Journal reported late on Thursday, citing people familiar with the matter.
The newspaper described the talks as serious, but said they may not lead to a deal.
Around 1630 GMT, CVS Health was down 4.8 percent to $69.75, while rivals Rite Aid dropped 4.5 percent and Walgreens Boots Alliance 3.9 percent.
Aetna, which spiked 11.5 percent in the final moments of trading on Thursday afternoon following the Journal’s report, dipped 1.4 percent to $177.73, holding most of its gains.
The possible deal comes amid signs that Amazon is preparing to expand into pharmacy distribution.
A report in the St. Louis Post-Dispatch said Amazon, which has disrupted the grocery business with its $13.7 billion acquisition of Whole Foods Market, had obtained licences in 12 states to become a wholesale pharmaceutical distributor.
“While these licenses do not seemingly permit [Amazon] to act as a dispensing pharmacy, it does allow it to deliver relevant pharmaceutical and medical products to pharmacies,” said a note from Credit Suisse.
“We can only speculate as to what Amazon’s next steps may be,” the note added.
“While we acknowledge the inherent challenges and complexities of the supply chain, the specter of Amazon continues to weigh on sentiment across our universe of distributors, pharmacies, and (pharmacy benefit managers).”
CFRA Research analyst Joe Agnese said Amazon’s move was the “big threat for the sector right now”.