The Federal Reserve's struggle with persistent low inflation in the US economy

Inflation

 

Appelbaum (2017) wrote a couple of different articles outlining the current inflation conditions in the US. The biggest issue that he identifies is that there is a mismatch between inflation and the performance of the rest of the US economy. He notes that the inflation rate dropped recently and that this “may be a sign of fresh economic weakness”. The Federal Reserve believes that “modest inflation has important economic benefits, and it has aimed since 2012 to keep prices rising at an annual pace of 2 percent.”

However, that has not been the case, and for the past six years the inflation rate has been below that target, despite solid GDP growth and an unemployment rate that has been declining since 2009. There are even psychological issues that are discussed by the author – a little inflation means that wages and profits increase, which people like. In real terms, there might not be any increase, but even an increase in nominal terms has a positive psychological impact.

One of the conclusions that comes from the article that that the economy has not received sufficient stimulus from the Fed, which flies in the face of reason, but a lack of inflation does indicate that. Inflation can also help an economy recover from recessions, so this persistent low inflation rate remains a problem.

A follow-up discussion from the same author (Appelbaum, 2017) was published in December. At the time of this article, the Fed had begun a program of increasing interest rates, and was expected to continue to do so throughout 2018. However, the inflation rate had remained persistently low, something that the Fed was having trouble figuring out. There were divergent views on what action the Fed should undertake, and the author interviewed a couple of people at the Federal Reserve about their views on the matter.

The first economist though that in the absence of strong inflation, the Fed should be conservative with respect to raising rates, and should probably not do so in order to avoid creating economic cooling. The first economist targeting a 2% inflation rate is actually at ta point where it is clearly doable, and the Fed should consider targeting a lower inflation rate.

The second economist believed that there were signs that the economy might start to see inflationary pressure. He felt that from a risk management point of view it was better to increase rates a little bit in order to ensure that inflation did not start to get out of control. This view is a little bit speculative, but it shows that different economists can have quite different interpretations of the same data.

The third article is from earlier this month in the Economist. The authors outline some of the interesting dynamics going on in the world. There is relatively low inflation in many of the most developed nations, but without the growth to justify. However, there is a fair amount of growth in the developing world. This can partially explain why developed economies are still growing – their companies are invested in the developing world. The logic also flows that if the developing world is seeing inflationary pressures, those will eventually arrive in the developed world. A good example would be China – if China faces inflation, then goods from China will inevitably become more expensive on the world market.