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Is inflation unusual?

| Posted by: Paul Donovan | Tags: Paul Donovan

  • The question "why is inflation low?" is repeatedly asked by journalists – normally when they do not have anything else to pontificate about. The reality is that most inflation numbers in the US and Europe are within a rounding error of the long-term average rate of inflation.
  • Inflation is, perhaps, lower than expected given economic recovery and the state of the labor market. Explanations like "globalization" and "technology" sound superficially impressive, but tend to collapse quickly when the evidence is examined.
  • Part of the reason for low inflation may be that non-market prices have tended to keep inflation in check. Non-market prices have become more important to the calculation of inflation overall. Of course, there is no guarantee that non-market prices will continue to be disinflationary.
  • Inflation may also be lower because central banks have been good at their jobs. For four decades, central banks have tried to bring inflation to a low and stable level. Now that they have succeeded, everyone is worrying about inflation being too low. Inflation is likely to increase a little over the course of 2018, with non-market forces potentially offering upside surprises.