New inflation numbers are out today from the BLS and they say prices rose 0.2 percent in March and 1.5 percent over the previous twelve months. That’s good news in the sense that if you’ve had the same nominal salary over that entire period, rising prices haven’t done too much to erode your standard of living.
Don’t celebrate today’s low inflation news
But while low inflation is generally good news, in today’s economy it’s really in many ways bad news.
One reason that’s the case is that inflation helps erase old debts. People with underwater mortgages, for example, would benefit from a more rapid level of price increase. Of course for everyone who wins that way someone else loses. But we’re currently in a situation where old housing debts appear to be a special burden on the economy.
More generally, though, a very low inflation rate is a sign that the economy is still depressed. The Fed prefers to ignore food and energy prices when using inflation as a predictor of future inflation, and that “core” index is up 1.7 percent over the past 12 months. That’s not identical to the 1.5 percent headline number, but it’s very similar. And in either case, it’s a sign of an economy where the demand for goods and services isn’t pushing the economy’s potential to supply goods and services to the limit. Again, in normal circumstances this would be good news. The Fed would respond to low inflation with an interest rate cut, and we’d all have the chance to get a cheaper car loan or mortgage and business owners could expand. But the Fed has already cut short-term interest rates to zero and seems very reluctant to take new unconventional steps.
So rather than a sign that the economy has room to grow and can expect a nice short-term boost from monetary policy, low inflation is just a sign that the economy’s not growing as fast as it should be. Terrible news if you’re unemployed, underemployed, burdened by mortgage or student loan debt.
Meanwhile, people who keep warning that Quantitative Easing is going to lead to out of control inflation keep being, well, wrong.
See More:
