Tuesday, November 28, 2006

Bernanke Speaks

Ben Bernanke spoke today in New York before the National Italian American Foundation on his economic outlook. The speech was mainly void of any relvalations. The Fed is more concerned about inflation right now, but sees inflation as moderating over the next year as the economy slows. We've heard that same basic statement from several Fed speakers as well as the public releases.

He did speak directly on the topic of rising labor costs, which I wrote about a few weeks ago. Here is the quote.

"What implications does the pickup in labor costs have for price inflation? One possible outcome is that increases in labor costs will largely be absorbed by a narrowing of firms' profit margins and not be passed on to consumers in the form of higher prices. The fact that the average markup of prices over unit labor costs is currently high by historical standards suggests some scope for this outcome to occur. If higher labor costs are mostly absorbed by firms and not passed on, then workers will see the gains in their nominal compensation per hour of work translated into greater real compensation per hour; in the process, workers would capture a greater share of the fruits of the high rate of productivity growth seen in recent years. The more worrisome possibility is that tight product markets might allow firms to pass all or part of their higher labor costs through to prices, adding to inflation pressures. The data on costs, margins, and prices in coming months may shed some light on which of these two scenarios is likely to be the better description of events."

So it comes down to your view of pricing power. Until recently, the feeling was that firms had very little pricing power, that globalization was taking it away. But once again, the money supply rules, and now it seems the deluge of money the Fed gave us in 2002-2003 has allowed pricing power to re-emerge. We'll see how it plays out.

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