Economic Perspective: Is Inflation Dead?

MARY WALDEN:

“Today’s programs asks if inflation is dead. Mike, one of the interesting aspects of your profession, economics, is that it continues to evolve and change. Consider inflation. 40 years ago it was rampant, rising at double-digit rates annually. Now policy makers around the world worry about deflation, or falling prices. What happened?”

MIKE WALDEN:

“Well we have seen a big drop in inflation not just in the U.S., but around the world. You allude to 40 years ago. Yes, we had inflation rates then annually 12, 13, 14 percent. Today we’re dealing with two percent, maybe two-and-a-half percent. But there are a lot of benefits to a lower inflation rate. For example, it makes it much easier for consumers to detect price changes that are due to individual markets. In other words if you have an inflation of say five percent, and the price goes up six or seven percent of something it’s hard for you to take out and know how much is due to inflation, and how much is due to actual factors in that market.”

“When there’s very little inflation you can pretty much assume most of the price change is due to individual markets. It also makes planning for future expenditures much easier. For example, retirees. One of the challenges of being retired is that you have to forecast how far your money is going to go, and that means you have to forecast expenditures. Well, if you have a very low inflation rate that makes it much easier to forecast those expenditures.”

“And then lastly I think low inflation really does keep businesses on their toes. They just can’t sneak a price increase past people where people think, ‘Oh that’s just due to general inflation.’ People are wise, and they know there’s very little inflation so if we see a price increase of five, six or seven percent we know that it’s due to that individual business, that individual product. So it really helps consumers out in that.”

“And I think the major reasons why we’ve seen lower inflation, I think international markets, international buying and technological advances are really the reasons.” 

Mike Walden is a William Neal Reynolds Distinguished Professor and Extension Economist in the Department of Agricultural and Resource Economics at North Carolina State University who
teaches and writes on personal finance, economic outlook and public policy.