Friday morning, the Bureau of Labor Statistics reported that consumer prices in the United States rose just 0.8 percent in 2014 — the lowest level since the crisis year of 2009. This will raise concern among economic wonks that inflation is running at a dangerously low level and undermining the “credibility” of the central bank’s 2 percent inflation target. Meanwhile, normal people — jumping for joy at cheap gasoline and excited by the prospect of modest 1.6 percent price increases outside the realm of food and energy — will think the wonks are insane.
Janet Yellen has a huge opportunity to boost the economy
Alex Wong/Getty Images
Here’s a better way to think about it. The low inflation isn’t a bad thing, exactly, but it’s a sign that the Federal Reserve has an opportunity — one it’s not necessarily taking advantage of — low interest rates.
The Fed has pegged short-term interest rates at a near-zero level for years, now. That’s great news if you’re looking to take out a mortgage or if you’re a company looking for a loan to expand operations. It’s also great news if you’re an entrepreneur looking for venture-capital backing, because the very low returns on safe assets are pushing investors to look for bolder ideas to back.
Recently, most of the buzz from the Fed has suggested that they’re looking to raise interest rates this spring in light of the improving unemployment rate.
The meaning of these inflation numbers is that there’s no need to do this. The downside of low rates is the risk of high inflation, but there clearly is no risk of high inflation. So we can — and should — keep enjoying the benefits of low interest rates. Indeed, we could enjoy even more benefits if Janet Yellen would just say this clearly. People enjoy a little predictability in life, so interest rates that you know are going to stay low are much better than interest rates that just happen to stay low. A clear statement that interest rates will stay low until there is clear and convincing evidence that inflation has risen would help everyone feel more confident about their financing and business planning. And everyone could enjoy the best of both worlds — cheap consumer goods and cheap money to fuel investment and job growth for the future.
