Behind Merrill's Lower Inflation Forecast: Lower NAIRU

A decline in the jobless rate the U.S. economy can support without inflation taking off is one reason Merrill Lynch & Co. keeps insisting, contrary to the stock market, that that inflation will decrease not increase over the next 12 months to 18 months, explains Merrill economist Sheryl King.

Merrill estimates NAIRU (the non-accelerating inflation point of unemployment) is now about 4.25%, below the nominal unemployment rate of 5.1%. "Until this 4.25% threshold is breached, there is very little risk of meaningful increases in unit labor costs," she notes.

And why is NAIRU down from the 5.5% level of the late-1980s? Less unionization, she replies. "It's easy to see that the dwindling union-heavy manufacturing sector is at the center of this movement and that globalization has been behind this drive -- a trend that shows no sign of slowing."

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