Economists Think Inflation Will Rise Sharply In 2018: They're Wrong

Authored by Mike Shedlock via,

Let's investigate six reasons economists think inflation is about to pick in 2018, and why I think they are dreaming.

Reason Number One - Wage Hikes

Minimum wages rise in 18 states starting in 2018.

Former Fed Vice-Chairman Stanley Fischer told Bloomberg TV on October 4, “I still believe we will have higher inflation. The basic mechanism here is unemployment is declining all the time, wages will start going up at some stage.”

Wage Hike Rebuttal

The National Bureau of Economic Research paper: Minimum Wage Increases, Wages, and Low-Wage Employment: Evidence from Seattle, 2017 concludes there was a negative benefit to low wage workers as a result of wage hike.

  1. A 9% reduction in hours worked at wages below $19/hour.
  2. A reduction of over $100 million per year in total payroll for low-wage jobs, measured as total sum of increased wages received less wages lost due to employment reductions. Total payroll losses average about $125 per job per month.
  3. The findings that total payroll for low-wage jobs declined rather than rose as a consequence of the 2016 minimum wage increase is at odds with most prior studies of minimum wage laws. These differences likely reflect methodological improvements made possible by Washington State’s exceptional individual-level data. When we replicate methods used in previous studies, we produce the same results as previously found.

This is an issue that's debated over and over again, mostly with poor methodologies to come to the desired conclusion.

In contrast, the NBER had "exceptional individual-level data".

Adding support the NBER's conclusion, the Bank of Canada estimates Minimum Wage Hikes Could Cost Canada's Economy 60,000 jobs by 2019.

By the way, and as discussed in Staggering Rent Increases in 2017, the median U.S. rental now requires 29% of median monthly income, according to Zillow. Between 1985 and 2000, renters spent about 25.8% of their income on housing.

Next, factor in student debt.

Finally, note the staggering fact that 24% of millennials are still paying down Christmas purchases from 2016.

The proper conclusion is wage hikes are not sufficient to pay down debts let alone to be used chasing the prices of goods and services higher.

Reason Number Two - Declining Unemployment

This is the Phillips Curve thesis.

The theory claims there is a historical inverse relationship between rates of unemployment and corresponding rates of inflation.

In short, falling unemployment will lead to a rise in inflation.

In March of 2017, Janet Yellen commented in a post-FOMC Q&A “The Phillips Curve is Alive“.

Also note that Stanley Fischer also mentioned falling unemployment as a determinant for rising inflation.

Declining Unemployment Rebuttal

In advance of the 1973-1975 recession, economist Milton Friedman correctly predicted both inflation and unemployment would increase.

Wikipedia offers this amusing comment: "In recent years the slope of the Phillips curve appears to have declined and there has been significant questioning of the usefulness of the Phillips curve in predicting inflation. Nonetheless, the Phillips curve remains the primary framework for understanding and forecasting inflation used in central banks."

It's rather amazing anyone still has faith in Phillips Curve nonsense.

Yet the outgoing Fed Chair, Janet Yellen, and the former Vice-Chair, Stanley Fischer, are believers.

Reason Number Three - Trump Tax Cuts

At the December meeting, the Fed upped its estimate of GDP growth on the expectation Congress would pass a tax bill.

According to the December FOMC Economic Projections, "Most participants indicated that prospective changes in federal tax policy were a factor that led them to boost their projections of real GDP growth over the next couple of years; some participants, however, noted that they had already incorporated at least some effects of future tax cuts in their September projections."

Tax Cut Growth Rebuttal

John Hussman discusses economic growth in his excellent stock market valuation article Survival Tactics for a Hypervalued Market.



"Given that record earnings and depressed corporate borrowing rates have not sufficed to boost net domestic investment beyond half of its historical norm, and prior tax windfalls (e.g. the 2004 repatriation holiday) were almost entirely expended on dividends and stock buybacks, there’s little reason to expect any sort of durable surge in capital spending. That’s particularly true given a 4.1% unemployment rate and already deep account deficits, since rapid growth in capital spending invariably emerges from wholly opposite conditions," states Hussman.

Christopher Whalen at The Institutional Risk Analyst says A Cash Repatriation Bonanza? Think Again

"One of the most outrageous fallacies put forward by economists over the past year is that lower US corporate tax rates will cause the repatriation of offshore cash balances. This view, which is widely endorsed by many analysts, fails to reflect the true nature of offshore tax schemes and how problematic it will be to reverse these complex transactions."

I suggest reading Whalen's excellent article to understand the numerous complexities involved.

Reason Number Four - Falling Dollar

The general theory in play is that a falling dollar means rising commodities and higher prices on goods, especially imports.

Falling Dollar Rebuttal



The above chart shows the year-over-year percentage change in the Personal Consumption Expenditures (PCE) price index vs the year-over-year change the US dollar index.

There is no relationship.

Reason Number Five - Money Velocity

This reason I found in a Tweet by LizAnn Sonders.



Money Velocity Rebuttal

A three month average vs a six month average offset by 21 months seems like a lot of curve fitting.

Here is a Tweet Reply by Martin Pelletier that makes sense to me.



By the way, let's look at what we are talking about here in actual terms instead of percentage increases.



Reason Number Six - Rising Price of Crude

The rationale behind this idea is a rising price of crude portends higher prices, and not just for food and energy.

Here is a chart that I created that shows the relationship.



Rising Price of Crude Rebuttal

There is merit to point number six.

Note that even core PCE prices which exclude food and energy are very highly correlated without having to do arbitrary time shifts.

However, point six implies the price of crude will climb still higher.

Will it? I don't know. Nor does anyone else. However, we can say that at least some of the recent rise is related to tension in Iran.

We can also say that Trump is fanning those tensions.

On the other hand, the Washington Post reports U.S. crude oil production is flirting with record highs heading into the new year, thanks to the technological nimbleness of shale oil drillers.


There is no basis for five of the six most popular reasons reasons behind the widespread belief that a big surge in inflation is on the way.

Oil might provide a reason, but if the price of oil declines, even core inflation is likely to decline.

What is Inflation?

Somehow we managed to get through all of these points and counterpoints without even addressing the questions: What is inflation? And how do we measure it?

The above discussion analyzes things using the Fed's preferred measure of inflation, core Personal Consumption Expenditures (PCE) as a meaningful definition.

Problems with the definition are numerous. PCE does not include home prices or asset prices in general.

The BLS uses a bizarre measure called Owners Equivalent Rent (OER) to calculate rent increases.

OER vs Case-Shiller Home Price Index



Here is the exact question the BLS uses to determine OER: "If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?"

OER has the largest weight in the CPI at 24.583%.

If the CPI included home prices rather than OER the impact would be 24.583% of the difference between the lines.

For example, in November of 2013, instead of reporting year-over-year CPI at 1.24% the BLS would have reported 4.06%.

Looking for Inflation?

The Fed, Bloomberg Econoday, and countless economic analysts are wondering why QE did not produce inflation.

It's right in front of their noses in home prices, in Bitcoin speculation, in demand for covenant lite bonds, and in dramatically understated medical costs.

Instead, the Fed believes in the Phillips Curve and thinks Core PCE is an accurate measure.

Bubbles Everywhere

As a direct result of the Fed's total incompetence in understanding inflation, bubbles are readily apparent in equities, in junk bonds, and in Bitcoin speculation.

No Economic Benefit to Inflation

BIS Deflation Study

​The BIS did a historical study and found routine price deflation was not any problem at all.

​“*Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive*,” stated the study.

​For a discussion of the BIS study, please see Historical Perspective on CPI Deflations: How Damaging are They?

​CPI or PCE deflation is not to be feared.

More precisely, price deflation is a benefit. Falling prices increase purchasing power by definition and thus raise standards of living.

​It’s asset bubble deflation that is damaging. When asset bubbles burst, debt deflation results.

​Central banks’ seriously misguided attempts to defeat routine consumer price deflation is what fuels the destructive asset bubbles that eventually collapse.

Unintended Consequences

If you one single compelling reason that inflation (as defined by the Fed and the academic illiterates) is not about to soar in 2018, here it is: a massive debt overhang.

Debt Deflation Coming Up

Another debt-deflation bubble bursting episode is coming up.

All it takes is an economic slowdown or a change in attitudes of greater fools willing to chase the market higher and higher.

It's the Debt Stupid

Conventional wisdom says we need more inflation to deflate away the value of of debt on the books.

As of November 30, 2017, Treasury Direct reported public debt as $20.59 trillion. That includes $5.67 trillion in debt we owe to ourselves (think Social Security).

At higher rates of inflation, interest on the national debt would soar.

Boston Fed President Eric Rosengren believes an Inflation Goal of 2% is Too Low.

San Francisco John Williams has stated that the Fed's 2 percent inflation target requires some rethinking, and likely needs to be higher.

What a hoot! Despite massive amounts of QE the Fed could not hits its inflation target using its own measure of inflation as a definition. Somehow they magically believe that setting a higher target will in and ofitself cause inflation.

Imagine what 6% mortgages would do to home price affordability.

Throw conventional wisdom in the ash can. In practice, the more debt and leverage the Fed stuffs into the system, the lower interest rates must be to support that level of debt.

Final Irony

We are close to the end of this inflationary cycle just as the average analyst thinks inflation is about to pick up.

The Fed might even buy into the notion of rising inflation, especially if crude does spike in early 2018.

Then economists will accuse the Fed of "hiking too much" when the fact of the matter is the Fed once again held interest rates too low, too long, in a foolish attempt to cram more debt into a system literally choking on debt.

Currency Crisis, Debt Deflation on Deck

Another round of debt deflation. a currency crisis, or both is in the cards. Timing is the only issue. It's far too late to believe anything reasonable can be done about the mess the Fed has created.

Buy Gold



Do yourself a favor, buy gold. It's a strong favorite to soar when faith in central banks comes into question.


JRobby Thu, 01/04/2018 - 10:49 Permalink

"Laugh Track Deafening !!!"

Only on stuff you really need and the price increases will be discounted by "seasonality and increased utility" factors.

YUNOSELL spastic_colon Thu, 01/04/2018 - 11:24 Permalink

Deflation is good for consumers and businesses not for the government. The government benefits most from inflation since they control the increase in money supply and benefit most when the new money has the highest value before it trickles out onto mainstreet and starts to be detected as inflation and prices raise. Therefore, governments will always prefer inflation over deflation.

In reply to by spastic_colon

MuleRider YUNOSELL Thu, 01/04/2018 - 12:35 Permalink

Not knocking how you explained it per se, but it can probably be stated in much simpler terms - though with an "extreme" example - whey governments always benefit (and thus prefer) inflation to deflation.  It boils down simply to revenue (i.e. taxes) collected.  For the government, their planning/thinking can be summed up by the following: MOAR!!!  So now to an example.  Let's consider a major deflationary situation where the average cost of all goods/services goes down 50% and I, individually, see my paycheck cut 15%.  Despite the 15% reduction in income, I should be ecstatic because ultimately I'm way better off than before given that the decline in everything I purchase far and away exceeds my lost other words, lower income but much better purchasing power.  

Now let's consider the government's (state, local, and federal) take on this situation.  When I buy $50 worth of groceries that used to be $100 or a $15,000 vehicle that used to be $30,000, what does that mean for the government's rake when they're pulling a straight 5% (or whatever it might be for that particular locale) of the price?  It means what they collect in taxes plummets.  That's just on the sales tax side; now take into account the income tax side as well.  Instead of making $50,000 per year I'm now making $42,500 in this example (15% less).  What happened to my tax burden? Goes down, right?  So, good for me, but absolutely NOT something the government wants to see as, again, it means they're getting a smaller cut.  Now magnify this across everyone in the economy instead of just for one person. 

Hell, you could probably take this a step further and throw in property taxes, capital gains taxes, etc. to consider.  Under my extreme scenario, asset values are likely much lower, on average. Makes it easier (hopefully) to buy a home as they should be cheaper, but those lower valuations mean lower tax revenue for the local government unless they jack the rates up in response.  

Want to know why governments hate deflation?  Look no further than taxes.  

In reply to by YUNOSELL

ed31337 MuleRider Thu, 01/04/2018 - 14:08 Permalink


I came to the same exact conclusion myself after installing 5KW of solar panels on my house. With only the minimum monthly electric bill to worry about ($22/mo), I decided I didn't really need a full-time job anymore. Now the gov't makes bumpkis on taxing my utility bill and a huge zero on income taxes. No wonder the gov't wants to impose import tariffs on cheap solar panels nowadays.

In reply to by MuleRider

NYC_Rocks MuleRider Thu, 01/04/2018 - 14:46 Permalink

Fair point, but there is something else to think about here.  First, I'm assuming inflation/deflation means expansion/contraction of the money supply.  Price increases/decreases are separate and may be caused by a result of the money supply change or other factors.  Speaking in respect to only the money supply, if there is deflation, then the government should be neutral because even though prices may fall (resulting in lower taxes), the value of the dollar on a real basis increases (each dollar buys more product/service), so the govt's purchasing power goes up also.  Granted it likely would take time for prices to fall.  But you are correct, it's all about tax and control.  The state is not our friend.

In reply to by MuleRider

Singelguy NYC_Rocks Thu, 01/04/2018 - 19:31 Permalink

Inflation/deflation is not necessarily a function of the change in money supply. Currency is very much a commodity whose value is determined by supply and demand. The demand is largely determined by the confidence the market has in that currency’s underlying economy and government. If the market has no confidence in the currency, increasing the supply of that currency only exacerbates the inflationary effect. Zimbabwe is a classic example of that dynamic. 

In reply to by NYC_Rocks

JRobby MuleRider Thu, 01/04/2018 - 19:18 Permalink

Yes Mule, but they can't think intangibly as you simply illustrate in your example. Their's is a one way street because when the value of collateral and cash flow streams required by covenants drop 15%, the banks teeter on insolvency.

In fact, they are insolvent as taken as a whole (including CB's and other "investors") because the FED and other entities have taken bad assets off their balance sheets to maintain an image of solvency. The Fed through purchases and investors through purchases funded with new low interest loans.

House of cards in the wind.

In reply to by MuleRider

Baron von Bud ReturnOfDaMac Thu, 01/04/2018 - 11:09 Permalink

It's a crappy analysis. Mish says, "In practice, the more debt and leverage the Fed stuffs into the system, the lower interest rates must be to support that level of debt." That statement assumes governments can control the long end of the yield curve. Suppressing long rates means the Fed will have to buy more 10yr bonds rather than deleverage. Can't have it both ways.

In reply to by ReturnOfDaMac

Mish Bay of Pigs Thu, 01/04/2018 - 12:12 Permalink

Bay of Pigs, did something happen to your reading skills? Perhaps you need some English lessons.

Did I not state:

"The Fed, Bloomberg Econoday, and countless economic analysts are wondering why QE did not produce inflation.

It's right in front of their noses in home prices, in Bitcoin speculation, in demand for covenant lite bonds, and in dramatically understated medical costs."

Did I fail, to mention I was discussing the Fed will not find inflation by "their" preferred measure which conveniently leaves out massive inflation in home prices?

In the past how many times have I pointed out tuition? You seem to have a severe memory problem as well as having lost rudimentary reading skills. 


In reply to by Bay of Pigs

Singelguy Baron von Bud Thu, 01/04/2018 - 19:35 Permalink

Correct. In order to buy more 10 year bonds, the Fed has to print even more money. Up until now, all that QE has inflated asset prices; stocks, real estate, fine art, and bitcoin. The valuations have now been pushed to such extremes, that in the process of attempting to keep interest rates low, the inflation will spill over into PCE which will in turn force interest rates higher. The entire process is self defeating and counter productive. 

In reply to by Baron von Bud

gatorengineer ReturnOfDaMac Thu, 01/04/2018 - 11:40 Permalink

Has anyone else noticed that in the last two months food prices have gone stark raving nuts?  OK, I get that its winter, but, a green pepper is $1.50 each, chuck roast is now $5.99 on sale, and loose apples are over $2 a pound.

The Author of this article neglects the 50 or so trillion printed globally  or otherwise created / Rehypothecated since 2008ish, that will continue to hit and drive essential commodity prices much higher.  what you need is going up what you own is going down.

There is no federal giverment measure of what people actually buy, so any giverment statistic is irrelevant.  I know that my cable company tried to jack my bill $30 a month, likewise water and sewer a double digit increase, and I am shopping my electricity, which has a delivered price of around 17 cents per kwh in eastern pennsytucky.

Meanwhile my wages are down drastically from 3 years ago, due to the collapse of the US engineering industry (power and energy specifically).

In reply to by ReturnOfDaMac

JMT gatorengineer Thu, 01/04/2018 - 13:58 Permalink

I have said the same thing about rents in the NYC & greater Boston Metro areas.. Forget about considering about buying a home (or even a condo) at todays prices.  Rents in both areas (the ENTIRE Metro areas have gone nuts -- can't find anything for less than $2,000 a month even as far north as the New Hampshire / Massachusetts border and even on Long Island 'semi' legal basement apartments are renting for over $2100 a month (with zero utilities included)

The reason why food prices & rents are so high is because PEOPLE WILL PAY THESE PRICES especially millennials who rely on mommy & daddy to pay their rent & student loans where credit has never been easier or more widely available

In reply to by gatorengineer

Singelguy JMT Thu, 01/04/2018 - 19:41 Permalink

The OFFICIAL UE rate is 4.1% but we all know that is a cooked number. BLS only counts people who are looking for work. Underemployed or people who have stopped looking are not counted. If you have a job that you work only 4 hours per week you are deemed to be employed. The true unemployment number is the U6 number which is closer to 16%. The government never reports that number in their headline. Check out for the real numbers. 

In reply to by JMT

Blue Dog Thu, 01/04/2018 - 10:50 Permalink

The biggest reason inflation will pick up in 2018 is that the Fed creates at least a trillion new dollars every year to fund the deficit at artificially low interest rates. Eventually we'll have hyperinflation like Germany had in the 1920s. Hyperinflation is a 100% mathematical certainty. The only question is when.

MEFOBILLS Blue Dog Thu, 01/04/2018 - 12:05 Permalink

Germany's hyperinflation was due to exchange rate pressures.  All hyperinflations in the modern era were due to exchange rate pressures. (The reichsbank was privatized during Weimar hyperinflation - it was not a government driven phenomenon.)

The rest of world no longer wanting petrodollars would be a trigger for dollar exchange rate pressure.  Dollar would be shorted in a similar feed-back loop to Weimar Germany. (Shorting bear raids create more dollar loans, which is unwanted positive feedback, i.e. dollar weakens = more loans, dollar weakens more = more loans, and so on, creating the hyperinflation spiral.  Yes, the private banking debt system sucks big bags of dicks with built in instabilities and rents.)

The U.S. since it's outstanding debts are denominated in dollars, would have more maneuvering room than Weimar Germany did.   So, no hyperinflation on U.S.horizon yet.  Instability in Europe will continue to drive flight into the U.S. stock market, holding stock prices high, TBill prices high, and interest rates low.

In today's world, all Western Private Central Bankers co-ordinate.  They do QE together, they do Swaps of national money units to maintain exchange rate windows.  This co-operation would have to change for U.S. economy to move into a hyperinflation realm. 

Weimar had to pay reparations in "hard currency."  France and Britain wanted to pay off their wartime dollar debts to U.S. Treasury, so they wanted Germany to pay them in dollars. France and England were milking Germany, even though they started the war. The U.S. didn't allow German goods importation, hence Germany could not acquire dollars. Germany dug themselves further into a debt hole by going into debt to wall street for municiple bonds.  Making more debt to pay off other debt is a classic debt money system malfunction.  Soros' ((grandparents)) sniffed out weakness, and shorted the mark, hence the hyperinflation.  After the hyperinflation, they used their "credit" power and bought out much of Germany.  Even Galician Poles (Jewish Poles from Shtetl settlements) ended up owning German land due to "loans" from their international brothers.

In 1933, when Hitler came to power, our ((friends)) struck again, and forbade buying of German goods worldwide.  This was an act of war, especially considering Germany's inflation history, and also that Germany needed to import food in those days.

Is it no wonder Germany was outraged after having been punked into WW1, then Weimar Hyperinflation?  You can only victimize a proud and generous people so much.


In reply to by Blue Dog

JMT Ghost of PartysOver Thu, 01/04/2018 - 14:06 Permalink

"main street' loves immigrants because they work all the retail service jobs that pay $15 an hour.. Most of these immigrants are the REAL racists and xenophobes..  I myself try to shop online as much as possible due to the horrendous customer disservice these days -- in todays environment of the strongest retail & consumer spending growth in history stores don't care if you never come back because there will always be 5 or more new customers for every one customer lost

In reply to by Ghost of PartysOver

Ron_Mexico wisehiney Thu, 01/04/2018 - 13:54 Permalink

and it should have happened in 2008-2010 time frame. But that would have easily made Goodly King Obola a one-term President. Honest folks might disagree, but without the TARP, the $787 billion stimulus package, and the massive Fed QE, the system would have cratered far worse than in the early 30's. But the downturn would not have lasted for a decade, because let's face it, shit just happens faster nowadays. And it would have flushed out the inherent rot built up in the system.  Instead, we just stitched up the abscess. Someday this will result in critical illness or death to the patient.

In reply to by wisehiney

wmbz Thu, 01/04/2018 - 10:56 Permalink

"All it takes is an economic slowdown or a change in attitudes of greater fools willing to chase the market higher and higher"

~ While I am not saying a slowdown can never happen, I firmly believe that the "greater fools" are always underestimated.

We have more greater fools than in any other time in known history!

two hoots Lady Jessica Thu, 01/04/2018 - 11:29 Permalink

Is this true:   a dollar spent at the store, then given as wages and spent again or for services/products the store needs and again used for wages, expensives whatever....the more that money turns over the state/local govs get 5-7%every turn (mostly)....therefore money velocity (+/-) affects tax collection also for those indicated?  

In reply to by Lady Jessica

lester1 Thu, 01/04/2018 - 11:03 Permalink

Thanks to globalization and massive trade deficits, many our dollars end up overseas. If those dollars ever returned, to America we would see Weimar style hyperinflation.

gatorengineer lester1 Thu, 01/04/2018 - 11:45 Permalink

You wouldnt because they wouldnt be spent as there is no demand.  Where the dollar is stored is largley irrelevant.

the reql question is now that companies can repatriate cash, why they arent selling foreign and buying dollars..... the dollar should be rocketing, not plummeting because of trumpanomics (at least till the cash is back).

In reply to by lester1

iLLivaniLLi19 lester1 Thu, 01/04/2018 - 11:50 Permalink

Which is why the Scheiss dollar is coming. There has to be a filter between domestic and foreign dollars to prevent hyperinflation. Since that cannot be done with cash it will be earmarked digital dollars. Not really any different from when we prevented US citizens to convert to Gold while allowing foreigners to.


Their challenge is how do they get rid of cash without destroying their high-low alliance? As the elimination of cash would hurt the poor most of all and collapse the underground economy. Not to mention all the profits they get from drug running and bribery. Maybe they expect the poor to adopt something like M-pesa or Ripple, highly liquid but useless for saving.

In reply to by lester1

alazybundy Thu, 01/04/2018 - 11:09 Permalink

Bring on the wild speculation.  According to these people the Dow should be negative now not making new highs.

Shepwave guys keep getting this crap right.   Complain all you want. Fax is fax.