USA: severe deflation is coming in the second half of 2022

The link between price inflation and the change in the labor force is practically linear in the USA. The rate of labor force change leads the rate of inflation by 1.5 years and the regression coefficient is approximately 3.0 after 1980, i.e. inflation is 3 times larger than the rate of labor force change.  Figure 1 shows the change rate (1/year) in the CPI and labor force (multiplied by a factor of 3.0 and shifted 1.5 years ahead). The 8-year-average irons out the yearly fluctuation and demonstrate the strength of the statistical link. Before 1980, the definition of CPI and labor force was different and had many revisions, but the link is the same with a different coefficient.  We have done a thorough statistical analysis of this link in a book and a series of papers

Figure1 . The long-term link between the change in the labor force and price inflation in the USA

The COVID-19 pandemic has a dramatic influence on the labor force in 2020 and 2021. The lack of wages due to an incredible decrease in the labor force (see Figure1 ) was compensated by the government social transfers of several trillions of dollars. This transfer created free money not matched by goods and services. This is direct dollar devaluation, which obviously ends in higher inflation observed in 2021. This is not economic price inflation described by the curves in Figure 1 as a balance between production as expressed in labor force level and personal income. The gap between inflation and labor force change will definitely return to the long-term trends unless the money printing is eternal.  Therefore, the drop in the labor force in the first half of 2020 will generate a severe deflation wave in the second half of 2022. Everybody knows how it is difficult to fight deflation. The money printed in 2020 and 2021 will deepen the deflation. The final price level in the deflation wave is driven by the labor force change according to the long-term link, but the fall will start at a much higher price level because of the money poured into the US economy for political reasons only.  

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