Where is the inflation?

The federal government is running large budget deficits. Interest rates remain low although higher after four increases in the past year as a result of Federal Reserve policy. Apparently no further increases are on the Fed agenda at the present time. The employment rate is 3.6%, a rate that appears more than full employment. Economic growth is in the range of 2 to 3%.

These economic conditions suggest that inflation should be increasing.

However, the inflation rate continues to be 2% or less. The Federal Reserve has targeted 2% inflation as a preferred rate of inflation. In January of 2012 the Fed set a target of 2% annual change in the price index for personal consumption expenditures, a target that they have met only once over the past seven years.

In the April 22, 2019, edition of Bloomberg Businessweek an article was included entitled “Who Killed Inflation.” They summarized the issue with the following statement: “Researchers are finding that low inflation is in large part a consequence of globalization or automation or deunionization — or a combination of all three — which undermine workers’ power to bargain for higher wages.”

Inflation — which is a rise in the general price level — has not occurred because workers lack the ability to gain the additional purchasing power needed to “bid up prices.”

Some economic scholars have “dusted” off an economic idea called secular stagnation which refers to an economy with a chronic or long term lack of demand. This can be caused by a variety of factors, which include savings greater than investment, households paying down debt, income inequality which shifts more money to the wealthy who would rather save it than spend it and an aging population which is also more inclined to save than spend.

The job creation of the technological revolution of the recent decades has not put wealth in the hands of the masses comparable to the growth of factory jobs in the last century. According to the Center on Budget and Policy Priorities, “Incomes grew rapidly and at roughly the same rate up and down the income ladder, roughly doubling in inflation-adjusted terms between the late 1940s and early 1970s.” In subsequent decades income growth for households in the middle and lower parts of the distribution has slowed sharply, while incomes at the top continue to grow strongly.

Secular stagnation by its definition is a long term problem. Nobel economist Paul Krugman says that at its root “it is the problem of building consumer demand at a time when people are less motivated to spend.” What, if anything, government can or should do to build consumer demand is always political and controversial. Tax cuts and/or government spending projects such as for infrastructure projects are options but include more government debt. Low interest rates encourage businesses and consumers to borrow and spend but can cause dangerous spending “bubbles” such as occurred in housing prior to the financial crisis in 2007.

With the current economy, wage increases have been predicted. Gains have occurred in the range of 3% but adjusted for the modest inflation that has occurred the result is limited added purchasing power for most wage earners and not enough to cause significant increases in inflation, according to some analysts.

The health of the economy is always a major issue in presidential elections. If current economic indicators remain as strong throughout the coming election, the incumbents will have an advantage. If inflation jumps considerably, the opposite will be true. Will the inflation rate be higher prior to the 2020 election? Where is the inflation?

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