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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.

What they're saying: Significantly lower prices for consumers can translate to shrinking profits for businesses. These businesses may then have to cut workers' pay or lay them off to make ends meet.

  • "When you go to a store and you see lower prices, that's great, but what are those lower prices driven by?" Beth Ann Bovino, S&P Global's chief economist, tells Axios. "If lower prices are because businesses have a much more productive way of making that product, then that's great."
  • But prices falling too rapidly is bad for businesses, which are usually locked in to costs, and could lead to a spiraling effect. "That means they have to let go of workers," Bovino says. "Workers no longer have their paychecks anymore, unemployment goes higher."

Background: In theory, with unemployment this low and a shrinking pool of available workers, companies should be bidding up wages to attract employees, thus igniting inflation. But that dynamic hasn't played out as it has in previous economic cycles.

The Fed's preferred measure of inflation came in at an annualized pace of 1.6% in June — below the 2% target, though a rebound from prior months. Indeed, the Fed "has failed to convincingly reach the goal" since formally adopting its inflation policy in 2012, despite already low interest rates, as the Wall Street Journal points out.

  • While it may seem like a slight miss, the Fed is concerned that low inflation will cause expectations for inflation to fall even further.
  • That would make it more difficult for the Fed to step in and cut interest rates in an effort to push inflation higher, leading to a deflationary environment.
  • "We’ve seen it in Japan. We’re now seeing it in Europe. ... That road is hard to get off," Powell told Congress earlier this month.

The fear of higher inflation may feel like more of a risk, because it's more recent in consumers' memory. By contrast, the last deflationary period in the U.S. was in the 1930s.

  • But "deflation is more painful for the economy and for individuals than inflation," Nathan Sheets, a former Fed official and current economist at PGIM, tells Axios.
  • "When you're in a period of deflation, what it's doing is it's sucking down the power of prices. Wages are falling and prices are falling. A deflationary environment tends to transfer resources from debtors to creditors," says Sheets.

The bottom line: Economists are wary that a 25 basis point cut — which many people expect the Fed to announce today — will be enough to trigger the type of inflation the Fed wants to see in order to prove that its 2% target is not, in fact, a ceiling.

  • Chicago Fed president Charlie Evans, a voting member of the Fed's rate-setting committee, said this month that on the "basis of inflation alone, I could feel confident in arguing for a couple of rate cuts before the end of the year."

Go deeper

11 mins ago - World

Report: U.S. calls for UN-led Afghan peace talks

Secretary of State Antony Blinken at the State Department in Washington, D.C., in February. Photo: Jim Lo Scalzo/EPA/Bloomberg via Getty Images

Secretary of State Antony Blinken proposed in a letter to President Ashraf Ghani steps including a UN-facilitated summit to revive stalled peace talks between the Afghan government and the Taliban, Afghanistan's TOLOnews first reported Sunday.

Why it matters: Blinken expresses concern in the letter, also obtained by Western news outlets, of a potential "spring offensive by the Taliban" and that the security situation may worsen and the Taliban "could make rapid territorial gain" after an American military withdrawal, even with the continuation of U.S. financial aid.

Harry and Meghan accuse British royal family of racism

Photo: Joe Pugliese/Harpo Productions via Reuters

Prince Harry and Meghan Markle delivered a devastating indictment of the U.K. royal family in their conservation with Oprah Winfrey: Both said unnamed relatives had expressed concern about what the skin tone of their baby would be. And they accused "the firm" of character assassination and "perpetuating falsehoods."

Why it matters: An institution that thrives on myth now faces harsh reality. The explosive two-hour interview gave an unprecedented, unsparing window into the monarchy: Harry said his father and brother "are trapped," and Markle revealed that the the misery of being a working royal drove her to thoughts of suicide.

Updated 4 hours ago - Axios Twin Cities

In photos: Thousands rally for George Floyd ahead of Derek Chauvin's trial

Demonstrators on March 7 outside the Hennepin County Government Center, where the trial of former Minneapolis police officer Derek Chauvin, charged with murdering George Floyd, will begin in Minneapolis, Minnesota. Photo: Chandan Khanna/AFP via Getty Images

Thousands of protesters marched through Minneapolis' streets Sunday, urging justice for George Floyd on the eve of the start of former police officer Derek Chauvin's trial over the 46-year-old's death, per AFP.

The big picture: Chauvin faces charges for second-degree murder and manslaughter over Floyd's death last May, which ignited massive nationwide and global protests against racism and for police reform. His trial is due to start Monday, with jury selection procedures.