Why Fed Officials Are Concerned About Too Little Inflation
RENEE MONTAGNE, HOST:
We have some numbers this morning from the government about something most people see as a bad thing - inflation. October numbers show a rise of 1.4 percent. That's shy of the Federal Reserve Bank's target inflation rate of 2 percent. Naturally, no one wants to pay more for goods and services. In fact, the major purpose of the Federal Reserve is to resist inflation. But these days, the Fed and its counterparts around the world are worrying about too little inflation, which is why we've got David Wessel on the line to clear up the confusion. He's director of the Hutchins Center at the Brookings Institution and a contributing correspondent for The Wall Street Journal. Good morning.
DAVID WESSEL, BYLINE: Good morning.
MONTAGNE: So start us off with the basics.
WESSEL: Well, the numbers bounce around a lot from month-to-month, but the prices of all the goods and services in the economy have been rising at a pace of about one-and-a-half percent a year according to what's called the personal consumption expenditures index. That's the inflation gauge the Fed favors. And that 1.5 percent is quite a ways from the Fed's 2 percent target. In Europe, which has a similar target, prices are up just 0.4 percent over the last year. And Japan is also having trouble getting prices up to its 2 percent target. So it's a global phenomenon.
Now, I should say there's always a lot of skepticism about these government measures. People tend to focus on the price of things that are going up, like college tuition or health insurance, and overlook the prices of things that are going down, like gasoline is. And consumers always have a hard time understanding that if a thousand dollars buys you a more powerful laptop this year than it did last year, the government counts that as a price decline. But nearly every available measure shows very, very little inflation. And at these low rates of inflation, there's even a risk of deflation or falling prices.
MONTAGNE: Although falling prices, now that really should be every shopper's dream come true. So what's the problem?
WESSEL: Well, falling prices are great as long as your wages aren't falling, too. And in deflation, they both fall together. Or if wages are sticky and they don't fall, then economists tell us that can make workers awfully expensive and lead employers to hire fewer people. It can actually produce more unemployment. In addition, most people borrow money, like a mortgage, and they owe a fixed dollar amount. And that doesn't change when wages and prices fall. So it gets harder to pay off your debts. And many of these same problems occur when inflation is just very low as it is today, which is why the Fed and the European Central Bank and all are working so hard to raise the inflation rate.
MONTAGNE: Although, why haven't these efforts by the central bankers achieved that result?
WESSEL: In part, this is a symptom of a global economy with too much supply - that is, too many empty buildings, too many empty factories, too many idle workers - and not enough demand. Now, the Fed expects a gradual rise in inflation towards the 2 percent goal if the economy continues to improve here as it expects 'cause more people working means more spending, and that means more demand and prices will go up.
But in part, this suggests that the World Central Bank, particularly the European one, haven't really done enough because their job is to keep inflation at target, and they're failing. Or maybe governments have been overly worried about deficits and have been too tightfisted. But some of this is a mystery, a manifestation of changes in the world economy that we don't fully understand, particularly the extent to which globalization and technology are holding wages down much more than anybody expected.
MONTAGNE: OK, David, how about an update on turkey or any other part of Thanksgiving dinner?
WESSEL: Not much inflation there. The government says the average frozen turkey price is 1.2 percent below last year. And there's such a big glut of cranberries that the Agriculture Department said this week it's going to buy 68 million pounds of them to try and stabilize prices.
MONTAGNE: Thanks, David.
WESSEL: You're welcome.
MONTAGNE: David Wessel, director of the Hutchins Center at the Brookings Institution and a contributing correspondent for The Wall Street Journal. This is MORNING EDITION from NPR News. I'm Renee Montagne.
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