“Low” Inflation is neither “transitory” nor “mysterious”

In a speech today, Chicago Fed president Charles Evans said:

Inflation has been too low for many years

Indeed, inflation has underrun our target throughout most of the post-crisis period. Core inflation did briefly reach target in early 2012, aided by the pass-through of earlier increases in energy costs, but it soon retreated. In the summer of 2016, core inflation rose to just under 2 percent, but it then fell sharply last March and has remained in the 1.3 to 1.5 percent range since then.

Many economists subscribe to the view that this latest drop in core inflation simply reflects temporary factors and that by early next year inflation will be back close to target. I agree this is possible. After all, we can point to some apparently one-off idiosyncratic factors that contributed to the March decline. And if this were our first bout of unexpectedly low inflation this policy cycle, I’d be quite receptive to looking through the most recent inflation data in formulating policy.

But this is not our first bout of unexpectedly low inflation during this policy cycle. For years, the FOMC’s Summary of Economic Projections (SEP) have had us reaching our 2 percent target in another year or two.4And for years this hasn’t happened.

The chart shows CPI core inflation and nominal spending (NGD) growth in the last two cycles.

Note that inflation falls after nominal spending growth is restrained, and the stronger the spending restraint, the bigger the fall in inflation.

During the present expansion, spending growth has been on the low side and highly stable. In such an environment, there is no way inflation can behave differently. As Charles Evans has likely surmised, the FOMC will wait until kingdom come for inflation to pick-up!

More likely, if the view held by some that the Fed will keep trying to manage a slowdown in economic activity is correct, we´ll likely see a further fall in inflation, this time accompanied by a rise in unemployment. In other words, a recession.




  1. Ispanyol
    // Reply

    Who restrains ? or Why nominal spending growth is restrained ? Can you explain little bit ?


    1. Marcus Nunes
      // Reply

      The Central Bank controls aggregate nominal spending (NGDP) growth closely. When it allows (forces, induces, whatever) NGDP growth to drop, inflation will follow suit…and so will real growth!

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