Where has Inflation Gone?

Inflation stays low amid vast public deficits and good employment and economic growth trends. What happened?

Those of us who grew up in the 1970's are permanently scarred by its economic malaise- inflation. As earlier generations were affected by their reigning economic conditions, from depression to prosperous expansion, we had a hard time shaking our syndrome, and keep looking for inflation around every corner.

But inflation is nowhere in sight, and no matter how much the government spends, it doesn't seem to matter. Prices simply haven't budged, past a very staid 1-3% inflation rate, for the last decade and more. It has put the lie to a generation of Republican scare-mongering, and is overall quite perplexing. Granted, the 2008 recession was extremely severe, was insufficiently addressed by fiscal spending, and is still affecting us in terms of lost economic capacity and lost employment. The current pandemic has been even more disastrous for employment and small business conditions. Yet, I think the question still stands- why are we now spending so much time fighting deflation, where we used to fight inflation?

I think the usual answers of global trade, declining worker power and unionization, and automation are significant, but there is one more that should be added, which is income inequality. Inflation is measured not in yachts and space ships, but in normal goods like groceries and appliances. The economy of these goods is largely ruled by lower income segments, and reflects pretty directly their income. At the higher end of the income and wealth scale, people tend to save rather than spend, which is why they are wealthy to start with. And what the rich do spend money on tends not to hit the basic inflation metrics very hard, like exclusive real estate, vanity philanthropy, and vulture capitalism. Their money does not, in any proportionate way, enter into the inflation-causing real economy.

State of inequality in the US, which has been growing much further during the Trump administration and the pandemic.

So one can imagine that, instead of looking for causality from inflation to income inequality- which may be a fool's errand- it actually works the other way around. High inequality is a societal condition where wages stay persistently low, at a subsistence level, (or even below), which saps both the cultural capital and the inflation-causing capacity of the working class and poorer sectors. At the same time, it funnels vast amounts of wealth to the already wealthy- money that mostly just gets squirreled away into the stock market, foreign bank accounts, government bonds, and other investments that are more or less unproductive, especially of inflation. It also causes a race for yield, which we see resulting in very low market interest rates- another result of inequality.

• Those mRNA vaccines are pretty great.
• Oh, how easy it is to project corruption onto others, if one ignores facts.
• On fairness.
• Graph of the week- unprecedented unemployment in the US.