Is Low Inflation Here to Stay?

Ahead of this morning’s UK inflation report, Morningstar’s Bob Johnson looks at demographic trends in the US that suggest inflation will be muted long term

Robert Johnson, CFA 15 August, 2017 | 9:29AM
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US inflation has now been below expectations for six months in a row, suggesting issues in the Federal Reserve's efforts to raise inflation rates closer to 2%. Indeed, the annualised month-to-month inflation rate has been under the Fed's 2% target for five consecutive months. There have been a lot of odd quirks that have pressured inflation rates in the monthly data since March but it seems that all of these quirks wouldn't keep popping up each month if inflation were really marching toward the 2% target.

Most economists, including us, had assumed that inflation would be quite a bit higher by now, perhaps up in the 2.5%–3% range instead of 1.6% rate we saw in July. We currently aren't even expecting that headline inflation to get back over 2% until May.

Many economists, including Fed Chair Janet Yellen, are rushing to use "quirks" such as falling hotel prices to explain the below-target inflation rates. If it were just one or two items they could be a plausible explanation. With new quirks popping up each month, we aren't so quick to dismiss all of them as special. Instead, it suggests to us that inflation remains relatively tame and that the inflation we are seeing is more sector-specific supply and demand issues rather than broad inflation with the pricing of everything going up at the same time.

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Robert Johnson, CFA  is director of economic analysis with Morningstar.