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.

HERE ARE THE FACTS:

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ONE MORE QUICK THING:

Our fall fundraising drive is off to a rough start, and we very much need to raise $250,000 in the next couple of weeks. If you value the journalism you get from Mother Jones, please help us do it with a donation today.

As we wrote over the summer, traffic has been down at Mother Jones and a lot of sites with many people thinking news is less important now that Donald Trump is no longer president. But if you're reading this, you're not one of those people, and we're hoping we can rally support from folks like you who really get why our reporting matters right now. And that's how it's always worked: For 45 years now, a relatively small group of readers (compared to everyone we reach) who pitch in from time to time has allowed Mother Jones to do the type of journalism the moment demands and keep it free for everyone else.

Please pitch in with a donation during our fall fundraising drive if you can. We can't afford to come up short, and there's still a long way to go by November 5.

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