"On one hand is the goods economy, where products like computers, gasoline and hair dryers are made and purchased, and where Americans spend roughly one-third of their money. On the other hand is the services economy, where cable guys, nurses and bus drivers jostle for the bulk of consumer spending.
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."
"Economic theory holds that as unemployment falls and labor becomes scarcer, wages and inflation should rise. But the theory—known as the Phillips curve, after 20th century economist William Phillips—hasn’t held up very well in the past decade. Since 2009, the unemployment rate has fallen from a peak of 10% to an 18-year low of 3.9% in April, yet overall inflation has remained stubbornly low, running under the Fed’s 2% target for most of the expansion."
"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."
"Prices for services tend to be “sticky,” meaning they’re slow to respond to changes in monetary policy or the broader economy. That means turning them around, should inflation exceed the Fed’s target, could become a challenge."
See also yesterday's post Has the Fed Flattened the Phillips Curve?