Low inflation rates remain a puzzle to central bankers around the world, including Japan and the Eurozone. As the Federal Reserve lays the groundwork for a further normalization of its policy instruments, it is finding it difficult to explain the sticky low inflation tied to the strong US economy.
The low inflation is puzzling because economic theory and empirical evidence suggests that increases and decreases in the monetary supply or interest rates set by central banks in the past caused – or at least were correlated with, rises and falls in the inflation rate. The fact that this relationship does not appear to hold currently might hamper the Fed’s plan to gradually increase rates throughout this year and even its balance sheet plans.
There are several possible explanations why low interest rates and low unemployment have not manifested in higher inflation rates yet. Fed Chairwoman Janet Yellen has attributed the recent weakness to declines in the prices of particular goods, such as cellphone-service plans and prescription drugs that are not likely to continue. She and other officials also have noted that the weakness of the global economy allowed the United States to import foreign goods at low prices.
Another countervailing view emphasizes the importance of real economic conditions. Low inflation has become a prevalent condition across a number of developed countries. A possible explanation is that growth in emerging economics introduces competitive forces, which help to hold down wages, while the importing of goods from foreign countries helps to put a cap on prices.
Another major factor contributing to subdued wage growth (which has not returned to the levels before the financial crisis) is the pressure through the civilian labor force participation rate. This has increased steadily in the last two years, after a strong decline in the aftermath of the financial crisis. See below.
If this incremental increase in the U.S. labor force is successfully absorbed into the U.S. economy, we expect increased wage growth to finally contribute to the inflation level.
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Low inflation rates remain a puzzle to central bankers around the world, including Japan and the Eurozone. As the Federal Reserve lays the groundwork for a further normalization of its policy instruments, it is finding it difficult to explain the sticky low inflation tied to the strong US economy.
The low inflation is puzzling because economic theory and empirical evidence suggests that increases and decreases in the monetary supply or interest rates set by central banks in the past caused – or at least were correlated with, rises and falls in the inflation rate. The fact that this relationship does not appear to hold currently might hamper the Fed’s plan to gradually increase rates throughout this year and even its balance sheet plans.
There are several possible explanations why low interest rates and low unemployment have not manifested in higher inflation rates yet. Fed Chairwoman Janet Yellen has attributed the recent weakness to declines in the prices of particular goods, such as cellphone-service plans and prescription drugs that are not likely to continue. She and other officials also have noted that the weakness of the global economy allowed the United States to import foreign goods at low prices.
Another countervailing view emphasizes the importance of real economic conditions. Low inflation has become a prevalent condition across a number of developed countries. A possible explanation is that growth in emerging economics introduces competitive forces, which help to hold down wages, while the importing of goods from foreign countries helps to put a cap on prices.
Another major factor contributing to subdued wage growth (which has not returned to the levels before the financial crisis) is the pressure through the civilian labor force participation rate. This has increased steadily in the last two years, after a strong decline in the aftermath of the financial crisis. See below.
If this incremental increase in the U.S. labor force is successfully absorbed into the U.S. economy, we expect increased wage growth to finally contribute to the inflation level.
Zacks Names "Single Best Pick to Double"
From thousands of stocks, 5 Zacks experts each have chosen their favorite to skyrocket +100% or more in months to come. From those 5, Director of Research Sheraz Mian hand-picks one to have the most explosive upside of all.
It’s a little-known chemical company that’s up 65% over last year, yet still dirt cheap. With unrelenting demand, soaring 2022 earnings estimates, and $1.5 billion for repurchasing shares, retail investors could jump in at any time.
This company could rival or surpass other recent Zacks’ Stocks Set to Double like Boston Beer Company which shot up +143.0% in little more than 9 months and NVIDIA which boomed +175.9% in one year.
Free: See Our Top Stock and 4 Runners Up >>