United States: The flexibility of supply explains the absence of inflation

Although the unemployment rate in the United States is very low and the capacity utilisation rate is high, unit labour costs are increasing little and core inflation is not rising. This can be attributed to the flexibility of supply in the United States: In the labour market, rapid growth in employment leads to a rise in the labour force participation rate which prevents employment growth from causing an acceleration in labour costs; In the market for goods and services, when the capacity utilisation rate becomes high, labour productivity has accelerated only slightly in the recent period, but the trade balance has also deteriorated; this prevents pressure on the goods market from becoming severe, and thus prevents price rises. The flexibility of supply in the United States is therefore a key factor in accounting for the absence of inflation at the end of an expansion period.