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Poverty persistence in the US is stronger than in other high-income countries

Using household surveys and administrative data from a variety of high-income countries, Zachary Parolin of Bocconi University and co-authors find that poor children are much more likely to become poor adults in the United States than elsewhere. In the U.S., the mean poverty rate of adults who spent all their childhood in poverty is 43 percentage points higher than that of adults with no child poverty exposure, compared to just 21 percentage points in Australia, 16 percentage points in the U.K., 15 percentage points in Germany, and 8 percentage points in Denmark. Weak tax and transfer policies in the U.S. account for a large part of the cross-country differences in the intergenerational persistence of poverty. If the U.S. adopted the tax and transfer policies of its high-income peers, the intergenerational persistence of poverty would fall by more than a third, the authors estimate 

Hedonic price index for retail goods created using machine learning

Creating hedonic price indexes—indexes that account for change in the quality of products—is a labor-intensive activity for the Bureau of Labor Statistics because of the large quantity of products on the market and high product turnover rates. Using Nielsen scanner data from grocery stores, drug stores, and mass merchandisers from 2006 to 2015, Michael Cafarella of MIT and co-authors use a machine learning algorithm to read product labels and develop hedonic price indexes for a variety of product groups, such as “fresh produce” and “household supplies.” While their index for non-food products closely matched previous indexes, their updated hedonic index for food products showed 2.8% cumulative inflation over the period, much slower than the 5.9% growth estimated by the traditional Tornqvist price index. The findings suggest that traditional price indexes may overstate inflation, “even in product groups that do not obviously feature fast technological progress.” 

Markets are attentive to FOMC member speeches, especially in times of uncertainty

Using a large dataset of Federal Reserve communications and a natural language processing model, Maximilian Ahrens of Oxford and co-authors explore the effects of central bankers’ speeches on financial markets. They train their model using the text and the economic forecasts in the Greenbook to create a mapping between “Fed Speak” and changes in the forecasts of output, unemployment, and inflation. Then, the authors apply the mapping to FOMC member speeches and estimate how the implied forecast changes affect markets using high-frequency techniques. They find that speeches that imply economic surprises, good or bad, increase volatility and tail risk in equity and bond markets. These effects are larger the further output and inflation stray from 2%. Their model can explain roughly 72% and 67% of the variation in the equity and 2-year Treasury Bond markets, respectively, in a short window around a speech. In contrast to some research, the authors do not find that central bank communications reduce uncertainty. 

Chart of the week: Prime-AGE Labor Force Participation Hits 16-Year high 

Labor force participation for prime age workers (25-54) hits highest rate since 2007.Source: Council of Economic Advisers

Quote of the week: 

QUESTION: “Another sensitive issue is ‘greedflation,’ where businesses take advantage of the inflationary environment to increase their profit margins, thereby stoking inflation. You have since recognized that the ECB has paid too little attention to corporate profits. Did this surprise you?”

“If one looks at the drivers of domestic inflation, both wages and corporate profits have recently played an important role. Many companies were not only able to fully pass on their higher input costs to customers, but they even increased their profit margins. This was to a large extent owed to the specific pandemic situation, when after the reopening of the economy strong demand outpaced constrained supply in a number of sectors. This gave firms higher pricing power,” said Isabel Schnabel, member of the European Central Bank’s Executive Board.

This can lead to what I call a profit-wage-price spiral, as opposed to a simple wage-price spiral (whereby rising wages and prices chase each other higher, Ed.). First, many firms raised their prices over and above their cost increases. Trade unions are now trying to negotiate higher wages, facilitated by the tight labour market and higher corporate profits. In the case of Belgium, there is even automatic wage indexation. The question then is how businesses will respond. Will they continue to fully pass on higher costs, or even more than that, or will they partially absorb them through lower profit margins? That will largely depend on how strong the demand for goods and services remains. That is where the central bank has a key role to play. Our monetary policy works by dampening growth in aggregate demand (through higher interest rates, Ed.), which makes it harder for firms to pass on costs and reduces workers’ bargaining power to push through higher wage demands.”

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