Inflation is Weak, Weak, Weak

The Wall Street Journal reports today on the most recent meeting of the Federal Reserve. They’re still planning to raise interest rates in December, but “many participants” are worried about weakness in inflation:

Minutes of the Oct. 31-Nov. 1 meeting, released Wednesday with the usual three-week lag, indicated that officials thought persistently weak inflation could stay below their 2% annual arget for longer than many expected, raising questions about the pace of rate increases next year.

….After touching the Fed’s 2% annual target earlier this year, inflation has been weak for seven consecutive months, according to the Fed’s preferred gauge, the Commerce Department’s personal-consumption expenditures price index.

….For much of this year, Ms. Yellen and other Fed officials said the shortfall in inflation could be caused by transitory factors, like a drop in pricing for wireless phone plans and subdued growth in health-care prices. But in the weeks since their last meeting, some have questioned how transitory the price weakness may be.

….There is also “some hint” that after many years of low inflation, inflation expectations may be drifting down, and “that would be a very undesirable state of affairs,” she said.

I don’t have anything new to say about this. I’m just reproducing it to revel in the sheer novelty of the writing. Until just a couple of years ago, can you even imagine a front-page Journal article describing 1-2 percent inflation as “weak” six times in less than a thousand words? It would have been low or steady or well-controlled, all of which sound like good things. But never weak, which sounds like a very bad thing.

And yet, it is bad. Low inflation makes it hard to maintain low interest rates when you need them. If the inflation rate is 1.6 percent, then a zero percent interest rate is effectively -1.6 percent in inflation-adjusted terms. That’s it. That’s as low as you can go. The Fed may think this isn’t a problem right now, but when the next recession hits it will be.

In theory, a central bank can engineer any inflation rate it wants. In reality, politics makes this asymmetrical. We’re willing to tolerate a recession of almost any size if we need to reduce inflation, but we’re not willing to tolerate money creation of any size if we need to raise inflation. This is perverse, but there you have it.

ONE MORE QUICK THING:

Or at least we hope. It’s fall fundraising time, and we’re trying to raise $250,000 to help fund Mother Jones’ journalism during a shorter than normal three-week push.

If you’re reading this, a fundraising pitch at the bottom of an article, you must find our team’s reporting valuable and we hope you’ll consider supporting it with a donation of any amount right now if you can.

It’s really that simple. But if you’d like to read a bit more, our membership lead, Brian Hiatt, has a post for you highlighting some of our newsroom's impressive, impactful work of late—including two big investigations in just one day and covering voting rights the way it needs to be done—that we hope you'll agree is worth supporting.

payment methods

ONE MORE QUICK THING:

Or at least we hope. It’s fall fundraising time, and we’re trying to raise $250,000 to help fund Mother Jones’ journalism during a shorter than normal three-week push.

If you’re reading this, a fundraising pitch at the bottom of an article, you must find our team’s reporting valuable and we hope you’ll consider supporting it with a donation of any amount right now if you can.

It’s really that simple. But if you’d like to read a bit more, our membership lead, Brian Hiatt, has a post for you highlighting some of our newsroom's impressive, impactful work of late—including two big investigations in just one day and covering voting rights the way it needs to be done—that we hope you’ll agree is worth supporting.

payment methods

We Recommend

Latest

Sign up for our free newsletter

Subscribe to the Mother Jones Daily to have our top stories delivered directly to your inbox.

Get our award-winning magazine

Save big on a full year of investigations, ideas, and insights.

Subscribe

Support our journalism

Help Mother Jones' reporters dig deep with a tax-deductible donation.

Donate