A new study by the Federal Reserve concludes that as long as long-term unemployed are able to participate in the recovery in jobs, inflation will remain below 2% this year and next. If the long-term unemployed are not able to find work, labor market tightness for more “employable” workers will increase, driving up wage rates and inflation.
What’s the point? The idea that long-term unemployed could actually cause a rise in inflation potential seems counterintuitive, however, as these workers lose skills, they become less employable, placing greater tightness on available pool of skilled labor. There is a variance of opinion among economists about this potentiality. While it remains to be seen how this plays out, if we had to bet one way, we’d lean more towards the side of rising inflationary potential, however, there are a number of factors that we believe will continue to restrain inflation including: demographics (aging of baby boomers), technology advancements (substitution of capital for labor), and a new era of low monetary velocity which reduces the growth or inflation potential of increased money supply.
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