The US is lacking one major facet, which threatens to unwind any potential future economic growth: inflation.
Lagging inflation has perplexed Federal Reserve members for many years now and has complicated the path to ending its lengthy stimulus plan.
The Fed decided in 2012 that the optimal level of inflation is 2% and have been quick to quench any real rise in asset prices. Still, the Fed have repeatedly fell short of inflation expectations, continuously missing the mark for almost six years.
Recently, inflation has actually pared off. The Fed waved off criticism, explaining that the lagging prices were due to ‘transitory’ factors which will soon subside and assuring analysts that if the ‘’inflation undershoot will be persistent’’ the bank will step in to adjust monetary policy.
The body are not expected to raise rates until December but will hopefully provide some insight into the balance-sheet reduction plan in today’s statement.
While the Fed have been tenacious in its predictions of higher inflation against a stubbornly muted economic backdrop, perhaps it is time for the Fed to be more pragmatic in its analysis. Inflation has consistently run below the target mark, a reason to continue to stimulate growth, especially given the interest rate hikes we’ve already seen.
Inflation is an imperative tool, used to warn off the perils of recessions by giving central banks more leverage to manipulate borrowing costs. Inflation can elevate wages and prices more quickly, giving consumers a more optimistic disposition as they rush to spend the extra cash.
It provides a buffer for deflationary pressures – as prices dwindle people tend to hold off on spending as they anticipate there will be better deals in the future.
Job growth remains robust, but is juxtaposed with lagging wages and prudent consumer spending, so growth remains moderate.
Perhaps a new model of economic theory needs to be compiled; factoring in the effects of globalisation, the threat of outsourcing that keeps wages down, the rapid expansion of developing nations which caps inflation in developed countries and the world-wide pattern of low inflation in the developed world.