June 20, 2017


Janet Yellen and the Case of the Missing Inflation (Neil Irwin, JUNE 14, 2017, NY Times)

The Fed has defined stable prices as inflation of 2 percent. Right now, not only are key inflation measures below that level, but they are also falling. The most recent reading of the inflation measure favored by the Fed is at only 1.5 percent. And the Consumer Price Index, excluding volatile food and energy prices, rose 1.7 percent over the year ended in May, down from 2.2 percent in February.

The gap between rates on regular and inflation-protected bonds suggests that consumer prices in the United States will rise only 1.6 percent a year in the next five years, down from 2 percent in March. Even for the five years after that, the rate of inflation implied by bond prices has fallen from 2.1 percent to 1.9 percent.

The recent inflation numbers are not so low as to suggest some deflationary spiral is imminent. It's probably not worth obsessing too much over prices rising 1.5 percent instead of the targeted 2 percent. The direct cost of mildly undershooting the Fed's inflation target is low, favoring creditors over debtors, for example, but it's not likely to cause any broad economic distress.

What is worrisome is not direct economic damage, but the fact that the Fed has missed its (arbitrary) 2 percent target in the same direction -- undershooting -- year after year. If it's not a drop in prices for cellphone plans, it's a falloff in oil prices, or cheaper imports because of a strong dollar.

That in turn implies that the low-growth, low-inflation, low-interest-rate economy since 2008 isn't going anywhere. 

Posted by at June 20, 2017 6:52 AM