Why has U.S. inflation been so low over the past decade when unemployment was often near record lows? Economic theory holds that a tight labor market results in upward pressure on wages. It also suggests that exploding government debt and easy money are inflationary, both of which we’ve had but with little effect on the price level.
U.S. inflation averaged only 1.7% over the ten-year period 2011 to 2020, never reaching the Federal Reserve’s target of 2% inflation. In only one of the years (2011) did the consumer price index reach three percent. In 2014 and 2015 inflation was particularly low, .8% and .7% respectively.
Low inflation in Europe and America is a conundrum. No single factor offers a full explanation but there are clues.
In separate analyses a French and British economist say China is a big causal factor. Louis-Vincent Gave, whose investment firm is based in Hong Kong, says China’s emergence into the global trading system upon joining the World Trade Organization in 2001 created a deflationary shock in which the much lower Chinese price became the global price for manufactured goods.
British researcher and author Stewart Paterson agrees. He says China exported deflation when 600 million Chinese came into the global market with wages 1/30th of what prevailed in western economies. Manufacturing shifted to China, hollowing out scores of American towns. Trade unions, already declining, had little clout to boost wages. The result, Paterson argues, was massive deflationary pressure in Europe and North America. Chinese membership in the world trading system, he says, has been good for China and bad for Europe and North America.
Federal Reserve Board chairman Jay Powell concedes that the absence of inflation is a puzzle. In April 2018 he cited lower oil prices, slack in the world economy and e-commerce (the Amazon effect) as factors holding down inflation. Since 2014 the oil price has fallen by 50%, translating into lower gasoline prices. Weak demand and oversupply have driven other commodity prices down nearly as much, as illustrated by the CRB index of Thompson Reuters.
In a late December Barron’s interview, Liz Ann Sonders, chief investment strategist at Schwab, asks why there wasn’t inflation in 2020 since fiscal and monetary stimulus boosted the money supply by nearly 25%? The answer, she says, is that “there is massive inflation, but it’s just been in asset prices, not in the real economy.” Technology stocks have shot up by 50% in the past year.
Jim Grant, financial historian and editor of Grant’s Interest Rate Monitor, predicts either a credit event or inflation will result from the trillions of dollars of negative yielding debt sloshing about in several economies. He blames central banks for suppressing inflation, driving interest rates down to their “lowest level in 2,000 years.” By flooding the global economy with credit—following the 2008/2009 financial crisis and now to address the global pandemic–Grant says central banks have broken the monetary system. Interest rates at or near zero, he says, are incentives for ever more risky investment behavior.
Harvard University economics professor Larry Summers says standard economic theory can’t account for the absence of inflation. “It failed,” he says, “to anticipate below target inflation during a decade of economic recovery.” A former treasury secretary, Summers has coined the term ‘secular stagnation’ to describe below optimum growth in Japan and major western economies. He says globalization, declining working age populations, and internet technologies have transformed economic activity. There is a glut of savings and not enough investment opportunities.
As 2021 dawns there is little prospect of higher inflation in Japan, Europe and North America. Fed chairman Powell professes not to be worried about inflation. And former Fed chairman Ben Bernanke says disinflation is a bigger risk than inflation.
But the predictably contrarian Jim Grant believes inflation could be the pin that pricks the bubble of global debt. “Inflation isn’t dead,” he says, “it’s just resting.” He doesn’t know when but he is convinced huge debt and manipulated, super low interest rates constitute a story that will end badly.#