For most of the twenty-five years prior to 2020, low inflation was the norm in the US (and in most developed economies). PCE* inflation, the Fed’s preferred measure for inflation, spent most of that time below 2%. In fact, in the aftermath of the Great Financial Crisis (GFC), deflation was the chief worry of policymakers. Other factors that contributed to the exceptionally low inflation data include:
- Globalization, which allowed businesses to reduce costs by sourcing labor and materials abroad;
- Slow GDP growth, particularly after the GFC since financial crises result in more sluggish and gradual recoveries which made it challenging for businesses to raise prices;
- Less investment spending by businesses following the GFC, which also kept GDP growth in check;
- Credibility of the Fed as an inflation-fighting central bank, which fostered low inflation expectations and became a self-fulfilling prophecy until 2021;
- New business models exemplified by Amazon which intensified retail competition and put real-time pricing information in the hands of consumers like never before.
CLICK HERE TO CONTINUE READING
TC127291(0622)1