ALWAYS AND ONLY A FUNCTION OF WAGE GROWTH:

Indeed, core services represented nearly all of the positive contribution to monthly inflation in December--just barely not enough to offset the massive negative monthly contribution from energy and the small negative monthly contribution from core goods. The price declines in energy and goods are a positive sign for the US economy--mostly reflecting improved supply situations in motor vehicles, fossil fuels, and other tradeable goods, but for the same reason that American monetary policymakers (generally) ignored these prices on the way up, they will be also be ignoring them on the way down. More relevant to them is the extremely high growth in core services prices--the more cyclically-driven items which are up more than 7% over the last year, growing at the fastest pace since 1982. In particular, being cognizant of the lags in official measurements of housing prices, Federal Reserve officials have emphasized the importance of prices for "core services ex-housing," which they believe give a more up-to-date picture of the wage-driven parts of inflation that must come down to ensure long-term price stability. Even as headline inflation falls, they will not believe their job is done until core services inflation returns to normal levels.

In the open studio of a renovated 36,000-square-foot factory in Los Angeles' Chinatown, a series of Shima Seiki automated knitting machines emit quick, whirring sounds. Around the machines, automated guided vehicles transport materials including spools of yarn in a Crayola box of colors, while robot arms fuss with uppers and outsoles rolling down the conveyor lines. Desks are buzzing with teams crowding over computers animatedly discussing design plans. This is the headquarters of KX Lab, a brand-new manufacturing facility making knit sneakers, through mostly automated techniques, in the heart of one of America's most important urban sprawls.

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