Research Officer and Economist Juan Sánchez and Senior Research Associate Hee Sung Kim explained that there are reasons to be concerned about very low inflation.
In a statistical analysis of the relationship between nonfarm labor productivity and inflation, an increase in labor productivity of 3 percentage points is associated with a reduction of inflation by about 2 percentage points, according to the authors.
Has demographic change affected U.S. inflation? Looking at the U.S. population from 2010 to 2016, the authors found that an increasing old age dependency ratio and a decreasing young age dependency ratio are associated with a 0.1 percentage point decrease in inflation annually, according to Sánchez and Kim.
Some economists believe that globalization has helped pulled down inflation, though others have found little evidence that the internationalization of goods and financial markets affects domestic inflation.
"Although inflation targeting does not necessarily imply inflation that is too low, the fact that inflation lower than the target is often considered better than inflation higher than the target may contribute to an inflation rate that, on average, is lower than the target," the authors posited.
Economists Alberto Alesina and Lawrence Summers have found evidence that suggests countries with more independent central banks are associated with low inflation.
Other economists also argue that inflation remains low due to the Fisher relationship, which says that nominal interest rates can be approximated by the sum of the real interest rate and the expected inflation rate.
https://www.stlouisfed.org/on-the-economy/2018/april/closer-look-reasons-low-inflation
In a statistical analysis of the relationship between nonfarm labor productivity and inflation, an increase in labor productivity of 3 percentage points is associated with a reduction of inflation by about 2 percentage points, according to the authors.
Has demographic change affected U.S. inflation? Looking at the U.S. population from 2010 to 2016, the authors found that an increasing old age dependency ratio and a decreasing young age dependency ratio are associated with a 0.1 percentage point decrease in inflation annually, according to Sánchez and Kim.
Some economists believe that globalization has helped pulled down inflation, though others have found little evidence that the internationalization of goods and financial markets affects domestic inflation.
"Although inflation targeting does not necessarily imply inflation that is too low, the fact that inflation lower than the target is often considered better than inflation higher than the target may contribute to an inflation rate that, on average, is lower than the target," the authors posited.
Economists Alberto Alesina and Lawrence Summers have found evidence that suggests countries with more independent central banks are associated with low inflation.
Other economists also argue that inflation remains low due to the Fisher relationship, which says that nominal interest rates can be approximated by the sum of the real interest rate and the expected inflation rate.
https://www.stlouisfed.org/on-the-economy/2018/april/closer-look-reasons-low-inflation
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