Low Inflation isn’t Unusual

Fed watchers and bond holders worry that inflation could spike, tempting the Fed to boost rates much farther than the current half percentage point the market expects in the rest of 2018.  With the Federal Open Market Committee, the central bank’s policy makers, meeting today and tomorrow these concerns are front and center.  This morning’s report from the Bureau of Labor Statistics showed the CPI up 0.2% in May and 2.8% over the last 12 months. Excluding the volatile factors of food and energy, the 12 month figure was 2.2%.  These figures are a bit higher than recent numbers: since the start of 2016, the average inflation rate was 1.8%.

Over the last 70 years inflation was as low as -3.0% during the 1948-49 recession and as high as 14.6% in 1980 during the second oil crisis.  High inflation is caused by oil price surges or wars. Inflation usually falls when the economy slows, but it takes a deep recession like the last one in 2007-9 to send it into negative numbers.  The chart shows the history of inflation since 1949, the shaded sections are recessions. There were four times when inflation topped 7.5%.  The first in 1948-9 was a spending surge at the end of World War II followed shortly by the Korean War. The two peaks in the 1970s were the 1973 and 1979 oil crises. Most notable though is the general trend – over seven decades the inflation rate remains essentially between zero and five percent. The average over the entire period, including spikes, is 3.5%.

Recently some analysts suggested that the internet and the rising share of on-line retail sales compared to traditional shopping is keeping inflation down. Research cited in the New York Times shows that price increases for goods sold on-line are generally lower than price increases for the same goods sold off-line.[i]  The impact of on-line sales are likely to increase. The share of retail sales on-line is now about 10%; at this rate it will be double that in 2024.

Today’s inflation rate is lower than the long term average.  Barring a war or another oil embargo and crisis, the figure should stay close to current levels.

[i] Austan Goolsbee and Peter Klenow, “Internet Rising, Prices Falling: Measuring Inflation in a World of E-Commerce,” working paper 2018-35, University of Chicago

The posts on this blog are opinions, not advice. Please read our disclaimers.

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