The goods economy has been transformed by trade and technological innovation over several decades, giving consumers access to inexpensive products made in foreign countries or automated factories. The services economy has been more sheltered from international competition and technological change. You can’t hire cheap Chinese labor to serve you pizza or a robot to teach your ninth-grader English.
Because of those differences, inflation behaves differently in the two economies.
. . . The divergence between goods and services price inflation is especially important now because of the unusual behavior of consumer prices.
. . . Look at the two economies separately, however, and a more complete picture emerges.
The conventional relationship appears to be holding up in the services economy but not in the goods economy. So far in this expansion, services inflation as measured in the consumer-price index has moved up from near 0.5% to near 3%, a trend that theory suggests should happen as unemployment falls. Something different is happening in the goods economy, where prices have been falling for much of the past five years as if disconnected from the overall unemployment rate.
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