Hi. We're here with Carl Tannenbaum, chief economist of Northern Trust. Carl, great to see you.
Good to be with you.
So even though the global economy has been doing well, inflation has been quiet. What's going on?
It's been remarkable. This combination of circumstances has been described as a Goldilocks situation where you have growth moving ahead very rapidly and prices modestly. That means that profit margins are good, and it's one reason why markets have done so well.
There have been a lot of reasons why prices have been somewhat quiet. We have the impact of automation which is taking its hold on both service and manufacturing holding down costs. We've also had inflation expectations, which are very low. And when people think that inflation is low and translate that into their wage demands and other things, it also helps to keep a lid on the price level.
And then finally, globalization. Resources are available for production almost anywhere and companies are more efficient at reaching out to those than they ever have been before.
Building on that, some are using the phrase, "the Amazon effect." What's your take on that?
Well given a fraction of things that my household buys from Amazon, I think it's a very real effect. But what it means more generally is that any product or product category that is sold online or where information is available online to consumers there does seem to be a discipline on the price. We're just more educated consumers when we can use those platforms.
That is effective for many products, but we do consume a lot of services which, as for now, are not as impacted by online commerce. And as a result, those are escalating more normally in terms of their price.
Do you think inflation can be tamed?
Well, it can be for long periods but we do have to respect what I call our economic speed limits. In other words, we can grow our productive capacity every year because we have more people in the labor force and because those in the labor force become more productive.
The combination of those two things usually allows us to grow every year at about 2% before we stress inflation. But if we grow above that speed limit, then the risk of inflation gets higher. We have been growing faster than that in recent quarters and given the prospective push that we're going to get from tax reform, we could sustain that over performance for a while.
What are the potential consequences if prices start to rise more rapidly?
We've already seen one influence which is that people's expectations about inflation, which were dormant, have all of a sudden come to life and those expectations are higher. That will translate into their wage demands and also the prices of some other things.
If that breaks containment, as it were, then the Federal Reserve, which has a 2% inflation target, may have to act more quickly and forcefully to keep inflation under control. And longer term interest rates may go up, and that would cost our treasury a bit more money. So very important to try and keep inflation under control.
Carl, great to get your views as always.