Several large economies have recently experienced low inflation, but their experiences have been very different, according to an article in The Regional Economist, published by the Federal Reserve Bank of St. Louis.
Silvio Contessi, an economist with the St. Louis Fed, and Li Li, formerly with the St. Louis Fed, examined the recent experiences of the U.S., Japan and the eurozone regarding inflation. At the time the article was printed:
Contessi and Li examined the components of the inflation rates for each economy.1 They found that the underlying trends appear quite different and that the low inflation rates in the three areas may have different explanations. For example, energy and food prices behaved differently in each economy:
Contessi and Li wrote, “These different directions suggest that the current inflation behavior in the United States, the euro area and Japan may be responding more to domestic conditions than to global conditions [at a time when global commodity prices are quiet].”
Why does the behavior of inflation matter for citizens? Contessi and Li point out that while slow price growth improves purchasing power of consumers, it also aggravates the real cost of repaying outstanding public and private debt.
The authors also noted that there are important lessons to be learned from historical deflationary experiences. If people begin anticipating declining prices, it can be difficult to reverse those expectations. Contessi and Li noted, “Obviously, inflation rates that are positive but closer to zero for a longer period carry bigger risks of altering inflation expectations.”
The authors concluded, “While the recent low inflation rates may end up being just a temporary phenomenon in some advanced economies, it remains important to monitor and to understand their evolution, in particular their connection to inflation expectations.”
This post has been updated to clarify the quote regarding inflation behavior responding to domestic conditions.
1 The authors used headline CPI inflation for each economy to improve comparability.