The government reported a few days ago that the consumer price index, our primary indicator of inflation, had risen only 0.9 percent over the 12-month period ending in September, despite unprecedented deficit spending and the Federal Reserve's controversial quantitative easing policy that is pouring $85 billion of "found money" into the economy each year. A reasonable person may well ask -- where did the inflation go?
Not to Europe where the latest data showed inflation to be even lower -- a piddling 0.7 percent. In France, it was only 0.6 percent. Both were four-year lows. In Germany it was only 1.2 percent, Spain 1.3 percent and Italy 0.8 percent -- all three-year lows. Even Britain reported inflation of 2.2 percent, another four-year low. Japan reported zero change in consumer prices last year, which reflects a step up from the previous deflation.
Perhaps no economic news of recent years -- cluttered with economic surprises -- has so befuddled economists as the historically weak rate of inflation. There are many factors for it:
- Population growth is leveling off reducing consumer demand for the normal range of products and services that comprise the inflation index. Less demand reduces upward pressure on prices. This is true throughout most of the developed world, including China.
- The decline of labor unions, at least in our country, has reduced upward pressure on worker wages and enhanced the power of management to reduce costs with less restrictive work rules and simpler layoff policies. All of which enables business to keep the costs of products and services under control.
- Intense competition from low wage countries is flooding our country with low cost products. This influx of cheap foreign goods has cost us several million manufacturing jobs, which in turn has greatly aggravated the growing income disparity in our country, but it does help dampen inflation.
In sum, inflation is not a thing of the past. It has merely gone underground for a while. I believe it is inevitable that it will eventually reappear in its traditional form of rising prices for food, fuel, rent, clothing, and other basic costs of living, and you will see this begin in 2014. Then the Fed will have to decide if it will fight inflation and taper, which would be its traditional role, or quietly decide that a little bit of inflation is a good thing. Janet Yellen may like a little bit of inflation."
Jerry Jasinowski, an economist and author, served as President of the National Association of Manufacturers for 14 years and later The Manufacturing Institute. Jerry is available for speaking engagements.November 2013