“Inflation can be too low as well as too high.” That was Fed governor Jerome Powell’s warning back in June. The data show that, based on the Fed’s own target of 2%, inflation is too low:
An interesting question is why post-crisis inflation has been so low, and what causes high inflation. Here’s a rundown of some of the debate.
Low inflation doesn’t seem to be for lack of effort
Mike Konczal made an important point in June. “Inflation is collapsing in 2013”, he wrote, despite the fact that “the Federal Reserve took extraordinary actions at the end of last year to hit its inflation target… The fact that inflation is falling even when more action is being taken should have us questioning whether a 4% move would have any traction”.
With that for context, there’s been an interesting debate over the last week about the origins of inflation in the 1970s, a time when 4% inflation would have been joyously embraced (instead it whipsawed from the mid-teens to mid-single digits and back again).
What if inflation is caused by factors the Fed can’t address?
Steve Waldman started the debate by asserting that “the great inflation [of the 1970s] was not at root a monetary phenomenon”: