Downside of low inflation: A weaker global economyBy CHRISTOPHER S. RUGABER
the associated press | February 20,2014ap file photo
For all of 2013, overall U.S. prices rose a scant 1.1 percent, the Federal Reserve’s preferred gauge shows. Inflation has been stuck below the Fed’s 2 percent target for two years.WASHINGTON — Since the Great Recession ended 4½ years ago, Americans have struggled with high unemployment, static pay and a slow economy. Yet they’ve had one thing in their favor: low inflation.
Well, hold the applause.
It might be unfathomable to people who still bear scars from the double-digit inflation of the 1970s, but what the global economy could use right now is a dose of higher prices.
Overall prices are barely budging because the economy is still weak. And the reverse may be true, too: Super-low inflation has likely slowed growth from the United States to Japan to Europe. It’s why the world’s central banks would like prices to rise.
Most people aren’t likely to work up much anxiety about low inflation. After all, the benefits can be great. Cellphone service has gotten cheaper. Breakfast cereal prices have dropped the past two years. So has the cost of bedroom furniture. TV prices have plummeted 29 percent since 2012.
And low inflation is surely preferable to runaway inflation. Back in 1980, U.S. inflation reached 13.5 percent.
Last year, overall U.S. prices inched up just 1.1 percent, according to the Federal Reserve’s preferred gauge. Inflation has stayed below the Fed’s 2 percent target for two years. On Wednesday, the government said its producer price index, which tracks prices before they reach consumers, had risen just 1.2 percent over the past 12 months.
Yet Ben Bernanke, the just-departed Fed chairman, has said policymakers worry as much when inflation is too low as when it’s too high.
What’s wrong with very low inflation?
Lots. When prices barely move, many people postpone purchases. Why rush, if the same price — or lower — will be available in six months? Collectively, these delays slow consumer spending, the economy’s main fuel.
Ultra-low inflation also makes the inflation-adjusted cost of a loan more expensive.
And too-low inflation raises the prospect of something worse: deflation — a broad decline in prices, pay and the value of stocks, homes or other assets. Deflation can further restrain spending and even tip an economy into recession.
Just ask the Japanese.
Japan has been stuck in a deflationary trap for most of two decades. Its economy has barely grown. Fears have spiked that Europe might be next.
For now, prices in Europe are ticking up — barely. Inflation in the 18 nations that use the euro currency rose 0.7 percent in January from a year earlier. In Japan, consumer prices rose 0.4 percent for 2013. That counts for good news: It was Japan’s first overall price increase in five years. Its central bank is trying to lift inflation to 2 percent.
So why is inflation so low across the developed world?
Blame a persistently subpar economy and a tough job market. When good jobs are scarce, businesses can hold down pay and prices. Companies can cheaply produce enough to meet demand.
“Prices have only gone down because nobody has any money to buy stuff,” says Antonio Duarte, a retired postal worker in Lisbon, Portugal, who favors discount stores. “It’s all about supply and demand.”
Other trends have contributed. Most clothing and furniture in the United States comes from lower-cost manufacturers overseas. Technological innovation has improved the quality of TVs and smartphones while cutting their costs.MORE IN National / World Business
LISBON, Portugal — An anti-austerity alliance including radical leftist parties takes... Full Story
- Most Popular
- Most Emailed