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Originally published February 19, 2014 at 6:14 PM | Page modified February 19, 2014 at 7:47 PM

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Economists not high on long run of low inflation

It might be unfathomable to people who still bear scars from the double-digit inflation of the 1970s and ’80s, but what the global economy could use right now is a dose of higher prices.


The Associated Press

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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 prices in the U.S. 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.

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.

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.”

Ask people if they’re enjoying low inflation, and you may encounter puzzlement. Many of us don’t feel it.

One reason: Apart from the government’s broad inflation gauges, many items have gotten much costlier over the past five or 10 years.

Though gasoline prices, for example, have risen just 1 percent in two years — a big reason overall inflation is low — gas is still nearly 14 percent costlier than before the recession. Drivers face that reality every day.

Health-care costs have long risen faster than overall inflation. And college tuition has soared 76 percent in 10 years.

Yet stable or falling prices for many other items have offset those trends.

On the other hand, higher inflation would make it easier for Americans to manage their debts.

Laurence Ball, an economics professor at Johns Hopkins University, notes that many car buyers have loans with rates of 2 percent or less.

If inflation were 3 percent or more, pay would likely rise. The car loans would become cheaper to pay off.

In Europe, higher inflation could help resolve that region’s economic crisis. Greece and other poorer members of the eurozone let wages and prices rise too high, and their goods became comparatively expensive.

If inflation were higher in the richer countries, it would help ease prices and pay in the poorer countries and encourage hiring.

In the United States, many economists have long feared that the Fed’s efforts to stimulate growth would ignite inflation.

Since 2008, the Fed has bought more than $3 trillion in bonds to try to keep loan rates low to encourage spending.

Yet to the surprise of many, all the money the Fed has pumped out hasn’t caused prices to jump.

“It’s a bit of a riddle,” says Richard Fisher, president of the Federal Reserve Bank of Dallas.

Other economists note that most of the money the Fed has created is being held by large commercial banks as reserves.

Consumers and businesses aren’t clamoring for loans. Banks have tightened their lending standards. So the new money created by the Fed hasn’t circulated through the economy, where it might have accelerated inflation.

Most economists foresee inflation remaining low for at least two more years. Fed policymakers have forecast that inflation will be just 1.7 percent to 2 percent in 2016.

They’d be happy to be wrong. An uptick in inflation “is a sign that growth is happening,” says Alberto Cavallo, an economics professor at MIT.



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