Full at: http://www.morganstanley.com/GEFdata/digests/20031020-mon.html#anchor0
Notwithstanding these highly visible moves in commodity prices and shipping activity, they pale in comparison to the importance of labor costs in driving the ups and downs of US inflation. This should hardly be surprising. For US corporations, worker compensation currently accounts for close to 80% of total production expenses -- around seven times the weight of raw materials inputs. As of mid-2003, unit labor costs for the nonfarm business economy were running 1.2% below their year-earlier level -- marking, in fact, the sixth quarter out of the past seven when this cost gauge has been contracting on a year-over-year basis. The implications for the broader inflation outlook are inescapable: Ongoing labor cost deflation far outweighs the impacts of the recent bout of commodity price hikes in shaping overall US inflation. Our official forecast of a 1.6% increase in the CPI for 2004 -- to say nothing of a 0.9% increase in the broader GDP chain-weighted price index -- is very much consistent with this line of reasoning. So, too, is the persistent overhang of excess capacity in the US labor market (6.1% unemployment rate) and product markets (73.1% manufacturing capacity utilization rate). Lacking in pricing leverage, businesses are not translating commodity inflation into CPI-based inflation.
This is precisely the same debate that many of us engaged in during late 1993 and 1994. Back then, the CRB spot industrials index was in the process of running up by about 40% from late 1993 to early 1995. Moreover, the Federal Reserve, which had been running an unusually accommodative monetary policy during the first 22 months of a jobless recovery, implemented an exit strategy aimed at "normalizing" its unusually low policy interest rate (3% at the time). A weak dollar was the icing on the cake for a full-blown inflation alert. The outcome was devastating for financial markets -- especially the bond market, which, in 1994, went through its worst correction in modern history. Ironically, that inflation scare turned out to be a false alarm. The reason: Unit labor cost pressures remained exceedingly well contained, generally holding in the +1% zone from mid-1993 to mid-1998. That more than offset the impacts of any temporary gyrations in commodity prices, and the CPI barely budged. Core inflation held in the 2.5% to 3.0% zone from early 1994 through mid-1997 and then actually trended lower toward 2% by mid-1999.
Sound familiar?
==================================== To this day, no one has come up with a set of rules for originality. There aren't any. [Les Paul]