Why is inflation so low?

As someone who has lived through the hyper-inflation days in the 80’s when inflation was 13 ½% (in 1980), nowadays the inflation rate is below 2% and has been for some time.  And with the economy arguably doing as well as it has in many years, why isn’t the inflation rate going up?  And with historically low unemployment – in May it was the lowest since 1969 – why isn’t inflation going higher?  I started thinking about this more after the Fed Chairman’s testimony to Congress recently where the subject of low inflation was discussed.  In fact, the freshmen congresswomen from New York actually got the Fed Chairman to state that the relationship between unemployment rate and inflation – also known as the Philips Curve, that assumes that low unemployment will bring higher inflation- is broken now.

So, what is causing inflation to be so low?  The main reasons economists are now saying that inflation is persistently low include:

  • Globalization has enabled the production of many goods in low-wage countries to be quickly transported anywhere in the world;
  • The “Amazon-effect”, that being shoppers now have easy ways to compare prices and can select the lowest prices to pay for goods;
  • Fewer workers belong to unions, keeping wages lower than otherwise; and
  • Automation has lowered costs of producing and transporting goods to consumers, keeping prices down.

So, this is all good news for consumers, but some inflation is good for the economy since it allows profits to grow and demand for goods to grow as well.  And this is another reason that the Fed is using to justify cutting rates.  Which is what we should see very soon.

To keep In The Loop with KMR's postings, please click here to add your address to our email list!