Is it becoming more difficult to raise inflation?

The short answer is no. So why does the WSJ suggest otherwise?

One reason the Federal Reserve is likely to cut interest rates this week is that inflation is running below its 2% target. New research shows why getting it higher has proved so difficult: many of the prices consumers pay don’t respond to the strength or weakness of the economy. . . .

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.

That’s the sticky price argument.  If only it were true.  Imagine if the Fed could raise demand at 8% or 10%/year, and yet inflation stayed close to 2%.  Living standards would soar.

Later, the WSJ switches from the sticky price argument to the fast productivity growth argument:

Federal policies such as restraint on Medicare and Medicaid payments to hospitals and doctors and increased approvals of generic drugs have ended a decades long trend of rapid health-care inflation.

Growth in the power and speed of computer processors has pushed down prices for most electronics and slowed inflation in services like telecommunications and photo processing. The fracking revolution, enabled by sensors and software that allow energy companies to better locate hydrocarbons, has kept oil and natural-gas prices in check throughout the expansion.

In fact, productivity growth since 2004 has been slow.

So that doesn’t explain the low rates of inflation.  What does?

Monetary policy has produced NGDP growth of roughly 4%/ year since 2009, and RGDP growth has average slightly above 2%.  That’s why inflation has averaged slightly below 2%.  If you want slightly higher inflation, then create slightly higher growth in demand, aka NGDP.  Adopt a more expansionary monetary policy. It’s that simple.



13 Responses to “Is it becoming more difficult to raise inflation?”

  1. Gravatar of Benjamin Cole Benjamin Cole
    28. July 2019 at 16:07

    What monetary policie should Japan adopt at this time? On a nuts-and-bolts level, I mean. That is should they go deeper into negative interest rates or expand the size of their quantitative-easing program or a third option?

  2. Gravatar of ssumner ssumner
    28. July 2019 at 18:25

    Nuts and bolts policies don’t work.

  3. Gravatar of Benjamin Cole Benjamin Cole
    29. July 2019 at 04:37

    Scott Sumner:

    Okay, what sophisticated, insightful and enlightened policies should the Bank of Japan adopt at this time, in terms of QE, interest rates, or other mechanisms, in their intelligent desire to hit an NGDPLT?

  4. Gravatar of Paul Paul
    29. July 2019 at 05:40

    Scott believes the CB only has to announce a NGDPLT, and the market will instantly respond to reflate the economy without any concrete action, now or later.

  5. Gravatar of Cameron Blank Cameron Blank
    29. July 2019 at 06:36

    The more I read that “inflation is a thing of the past” the more certain I am of a rise in inflation. At least we still all know how to beat high inflation, right? …. right?

  6. Gravatar of ssumner ssumner
    29. July 2019 at 07:46

    Ben, Policies or tools? The policy is NGDPLT, targeting the forecast. The tool is open market operations.

    Paul, Stop being an idiot.

  7. Gravatar of Philo Philo
    29. July 2019 at 08:22


    It’s not polite to call a commenter an idiot, even if it’s true.

  8. Gravatar of Derrick Derrick
    29. July 2019 at 09:21

    The answer may be acyclical vs. procyclical sectors of the economy and their respective inflation pressures:

    “Figure 1 shows that the two inflation series occasionally move together. However, there are periods when
    they have diverged—in the late 1990s through early 2000s and again starting in 2014. In both of these
    periods, overall inflation was low—1.7% and 1.6%, respectively. In line with the historical relationship,
    procyclical inflation has steadily increased over the past few years as the recovery continued to gain steam
    and economic slack diminished further. However, acyclical inflation has gradually declined.
    The patterns of these two groups suggest that core PCE inflation has been persistently low due to weak
    acyclical inflation. ”

  9. Gravatar of msgkings msgkings
    29. July 2019 at 12:24


    What makes you think he wanted to be polite to that commenter? After all, Paul’s comment was pretty snarky and impolite to Sumner.

  10. Gravatar of Paul Paul
    29. July 2019 at 15:28

    If standard OMOs were sufficient, we wouldn’t have had to try unconventional quantitative easing.

  11. Gravatar of Nick Nick
    30. July 2019 at 02:25

    Scott, I sense there is probably a terminology problem between articles you reference such as the one in the above post. I think many people are anchored in this idea that interest rates are in an absolute sense how easy monetary policy is. Assuming that interpretation, i think their question then is really what is different about the world now that 4% NDGP growth is achieved with nominal rates near zero whereas previously 4% (or slightly higher) was achieved with nominal rates at 4ish percent. I think they articulate this question as why is it so hard to generate inflation, and you answer that its not given the level of NGDP we have.

    Similarly one might ask, why are real rates so low now. I think there are 2 factors that explain some of it. no doubt there can be many explanations.
    1. world wealth has increased faster than ‘safe’ assets have been created, more demand for savings and slightly longer duration demand means that your return goes down.
    2. europe/us/uk financial regulation since 2008 has required more safe assets be held by regulated entities, i think again pushing down real yields on ‘safe’ assets relative to equities and other higher yielding investments.

    Philo i agree.

  12. Gravatar of TallDave TallDave
    31. July 2019 at 06:05

    I see this more and more lately under the rubric of “secular stagnation.” But as you’ve noted it’s built on some false assumptions.

    People making that argument get very confused when you suggest CBs could spark inflation by changing their target… it’s a very tools-based argument that does not properly appreciate the role of expectations.

  13. Gravatar of TallDave TallDave
    31. July 2019 at 11:50

    Benjamin Cole 29. July 2019 at 04:37

    Don’t want to speak for Scott, but BOJ could announce to markets there is no more inflation target, just a nominal GDP target of 5% supported by OMOs, sterilized OMOs, QE/QT, interest rates, helicopters dropping pallets of yen — pick any combination of the above. Markets would then do their best to decide to how much they trust BOJ to keep to the target, place their bets accordingly, and as they gained trust expectations would eventually converge around steady 5% NGDP growth (just as US inflation expectations gradually settled as it became clearer the Volcker regime would survive).

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