Is the Federal Reserve falling behind the curve in tackling inflation?

Bloomberg reports that there are signs that a fall in productivity growth may boost inflation in the US.

Federal Reserve Chair Janet Yellen faces an economy that is starting to look more like Arthur Burns’s in the 1970s than Alan Greenspan’s in the 1990s.

Productivity growth is slowing, just as it was when Burns headed the central bank, not accelerating as it did under Greenspan’s watch. Business output per hour excluding agriculture has risen at a 1.4 percent average annual rate since the recession ended in June 2009 as hiring has picked up while economic growth has lagged behind.

That result is in line with the 1.5 percent rate from 1973 to 1977 and less half of the 3 percent pace from 1996 to 2000, Labor Department data show. The post World War II average is 2.3 percent.

To understand why this is important, look at what happened to the U.S. in each of those periods.

In the late 1990s, increased worker efficiency allowed Greenspan to countenance a fall in the unemployment rate to a 30-year low of 3.8 percent in April 2000 as companies could pay employees more without having to raise prices. In the 1970s, a sudden downshift in productivity growth caught Burns by surprise and led to a rise in consumer prices of more than 10 percent after oil costs surged.

Some economists are concerned about whether the Fed will adjust in time to the recent trend.

“There is a risk,” said former Fed Vice Chairman Alan Blinder.. “You do have the possibility of replaying in the same direction what happened after 1973...”

What it does mean is that Yellen and her Federal Open Market Committee colleagues must be a “little more cautious” about keeping short-term interest rates near zero in their pursuit of lower joblessness, said Blinder...

“We are facing a problem of rising inflation,” said Martin Feldstein, a professor at Harvard University... The Fed is “probably going to respond too weakly, too slowly,” he added...

Long-term interest rates are “going to go a lot higher,” with the yield on the 10-year Treasury note eventually hitting 4 percent, as price pressures intensify and the Fed lags behind in its response, according to Joe LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc.

While the world's largest economy starts worrying about inflation, economic data on Monday from the second and third largest developed economies suggest that maintaining growth remains the concern.

Japan's coincident index was unchanged at 111.1 in May but the leading index fell for the fourth consecutive month to 105.7, the lowest since February 2013, from 106.5 in April.

In Germany, industrial production fell 1.8 percent in May, the third consecutive decline. The economy ministry said the decline in output was primarily due to the timing of the 1 May holiday and should only be temporary.