Mobile Phone Bill Indicator Says Fed Should Delay Next Rate Hike

Where did inflation go? That’s a good question. If you ask U.S. Federal Reserve Chair Janet Yellen, she may tell you that it’s out there, but not ready to reappear in the numbers until wages start to rise. This may be true but why would wages rise?

In the past, workers would move from job to job so in order to hold onto a valued employee, an employer would offer them more money. However, nowadays it seems the employer will just replace that worker with automation. If this is happening then it’s easy to understand why an employee would not want to run the risk of losing their job.

Perhaps employers aren’t raising wages fast enough to increase inflation because they can’t afford to given all the benefits they are now offering including healthcare, maternity leave, and more paid days off in addition to normal sick pay.

According to the Labor Department, the Consumer Price Index was unchanged in June because the cost of gasoline and mobile phone services declined further.

I can understand the drop in gasoline prices having an effect on inflation, but does this mean that the arrival of the electric car, or increased use of public transportation is going to determine whether the Fed raises rates at least one more time in 2017?

“Can you hear me now?” as the Verizon pitchman, now the Sprint pitchman used to say, could be what Fed Chair Janet Yellen was saying last week when she told the Senate Banking Committee she was concerned about inflation.

The financial markets have been hearing you, but investors haven’t been listening to you because your words and your actions haven’t made sense to bond and stock market investors.

The price action in these two markets late last week strongly indicate that Yellen may have just greenlit another round of lower Treasury yields and another leg up in the stock market.

Last week, Yellen moved towards acknowledging that it might not just be transitory factors that are holding inflation back after telling investors for months that it was. In October 2016, she said the Fed may have to run a “high-pressure economy” and allow inflation to overshoot their 2 percent mandate.

Essentially, in about nine months, Yellen went from considering allowing the economy to overheat to trying to decide whether to raise rates a third time with inflation muted.

Stock and bond market investors spoke loudly and clearly last week and I tend to trust them rather than the Fed at this time because they have skin in the game. All Yellen has to worry about is not causing an economic disaster on her watch before she officially leaves the position.

In my opinion, the Fed should step back and delay the next Fed rate hike until early next year. Perhaps by then Yellen’s mobile phone bill will have gone up.