Jul 30, 2019

Central banks can't seem to control inflation

Jerome Powell. Photo: Win McNamee/Getty Images

More research is beginning to show that controlling inflation is quite complicated, WSJ's Paul Kiernan writes.

What's happening: "Recent studies have shown prices in some sectors—such as housing—do indeed rise faster when growth is in full swing, unemployment low and markets frothy. But a large chunk of the economy, from health care to durable goods, appears insensitive to rising or falling demand," Kiernan says.

  • It's not just those sectors. "Prices accounting for nearly half of the Fed’s preferred inflation gauge, the personal-consumption-expenditures price index, don’t respond to changes in economic activity," according to a recent paper from economists at Harvard and Princeton.

Why it matters: "The Fed influences inflation by lowering rates to spur demand or raising them to curb it. The new research suggests that to lift overall inflation the Fed may have to stimulate larger price increases in sectors where the Phillips curve still exists to compensate for subdued inflation in those where it doesn’t,” according to the WSJ.

  • "Lately, it’s been a losing battle."

Go deeper

Why the Fed wants higher inflation

Illustration: Rebecca Zisser/Axios

Low inflation may sound good to consumers, who like what it suggests about the prices they'll pay. But the Federal Reserve — which will likely cite the lack of meaningful price increases as a motive for cutting interest rates today — has reasons for concern.

Why it matters: Inflation has come in below the Fed's "sweet spot" — 2% inflation — throughout much of the record-long economic expansion, and consumers have benefited from low prices accompanied by low borrowing costs. But Fed chair Jerome Powell has pivoted to warn of the dangers of weak inflation — a shift from the more common fear of rising inflation, like the type of soaring prices seen in the late 1970s and early '80s.

Go deeperArrowJul 31, 2019

How Jerome Powell's tone on inflation has changed

Data: Axios analysis of Powell's speeches and interviews; Graphic: Andrew Witherspoon/Axios
Go deeperArrowJul 31, 2019

Bond investors are not worried about inflation

Illustration: Sarah Grillo

Bond investors were unfazed by Tuesday's consumer price index reading, which showed inflation picked up meaningfully in July.

By the numbers: The U.S. consumer price index rose a seasonally adjusted 0.3% last month from June and 1.8% from a year earlier. The core reading excludes volatile food and energy categories, up 2.2% year over year.

Go deeperArrowAug 14, 2019