Why Is Inflation so Low? | Econofact
The evolution of inflation is relevant for all economic actors. However, for policymakers at the Federal Reserve, understanding the sources low inflation is of paramount importance. If the low inflation reflects persistent factors that will restrain inflation for an extended period of time, then the Federal Reserve could reasonably set interest rates at lower levels and would need to be highly attentive to the possibility of declining inflation (particularly in the event of a recession). On the other hand, if the low recent inflation reflects transitory factors that begin to abate and the economy remains reasonably strong, then the Federal Reserve likely would need to set interest rates at higher levels as the usual relationship between unemployment and inflation again becomes evident. Mistakes could be costly, leading either to inflation that falls further below the Federal Reserve’s target or inflation that rises too far above, in which case the Federal Reserve likely would raise rates significantly (possibly enough to cause a recession). Although much interesting economic research has shed light on recent inflation behavior, the Federal Reserve will have to make decisions with imperfect information about these issues.
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