Is It Time to Worry About Low Inflation?

Lackluster inflation in the U.S. and Europe has some worried about countries running the risk of deflation. As companies are unable to increase prices for fear of losing customers, the price of goods and services has only inched up 1.7 percent over the last year. In Europe it is even more bleak, with prices increasing 1 percent as the European Central Bank continues to prop up the economy. With the news of low inflation, the Fed is expected to keep its easy money policies in place, as it has room to maneuver the economy towards growth.

CPI

Source: Bureau of Labor Statistics

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However, not everyone is in favor of such action, as the Federal Reserve Bank of Richmond President Jeffery Lacker thinks these are just “temporary deviations,” warning that “we should not overreact.” Regardless, analysts expect aggression from the Fed as long as the number remains below the two percent which is considered healthy.

There is the possibility that falling gas prices could help restore the metric to its normal level, as the Commerce Department has found that consumers have spent some of their savings from gasoline elsewhere. With car fuel efficiency on the rise, and Consumer Reports finding it to be a top issue with those looking to buy a vehicle, a downward trend on gas prices could be likely in the long run. Jim O’Sullivan, chief economist with High Frequency Economics, says that this can act “like a tax cut for consumers, offsetting some of the payroll tax hike,” with the hope being that it could modestly spur retail prices over time.

Unlike Mr. Lacker, some are more concerned with the news of low inflation, with St. Louis Fed President James Bullard saying, “I’m getting concerned about that, and I think that gives the FOMC some room to maneuver on its monetary policy.” Moreover, Bernard Baumohl, chief global economist for the Economic Outlook Group, notes that historically, economies perform best with inflation around two or three percent.

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Concerns such as those held by Bullard may be alleviated today, though, as The University of Michigan and Thompson Reuters released their monthly consumer sentiment report — with quite promising findings.

The overall index rose to 83.7, up from 76.4 in April, with households feeling ever more confident about their finances. This number also represents the highest figure for the report since July 2007. The gauges for the consumption of durable goods and economic conditions both rose, with the latter reaching pre-recession levels. Moreover, with concerns about low inflation looming, the report’s one year expectation for inflation remained unchanged from last month at 3.1 percent.

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