Low inflation "mystery"

I have been writing about this topic for a while now. I think that exponential growth in technology is making everything more efficient and cheaper. It is also lowering the cost of energy production which is an input into any work, and work is needed to created value.


The above link [“Yellen’s ‘mystery’ of low inflation no closer to being solved as prices ease again in August”] is a commentary on what the Fed’s view on inflations is.

Federal Reserve Chairwoman Janet Yellen recently called the persistence of low inflation a “mystery”, and a mystery it remains. Prices pressures viewed over a one-year span eased again in August…

On Friday, the government said the Fed’s preferred inflation barometer increased last month at the slowest pace in almost two years…

The so-called core PCE index, which omits food and energy, showed a 1.3% gain from August 2016 to August 2017. The core rate slipped from 1.4% in the prior month and touched the lowest level since November 2015…

One source of inflationary pressure, Yellen and her allies believe, is likely to come from rising wages. The unemployment recently touched a 16-year low of 4.3% and there are growing shortages of skilled workers to fill a record number open jobs.

The problem is, wages still aren’t rising very rapidly and there’s no sign of a major upsurge.

The downturn in inflation is now causing some members of the Fed hierarchy to question how much more they need to raise interest rates. Chicago Fed President Charles Evans said the central bank should hold interest rates at current levels until clear signs of inflation emerge.

We will need to watch and see what happens. Recently, the Fed met and basically said that they want to raise the Fed’s Fund rate in December and then 3 more times in 2018. I heard after the FOMC meeting that the “market” thinks that there is a 70% change on a 0.25% interest rate hike in December. I’m not so sure. I think the chance of that happening is a lot lower than 70%. The Fed has been data dependent and there is more data to come which will be used to make a decision. I think that AI is starting to have an impact on businesses’ efficiencies and I think we will see this impact accelerate in the next few years. Will AI and other technology advancements largely contribute in keeping inflation low? I think it’s very likely, and if it turns out this way then we could be in for a major bull market run in the stock market.



Why don’t they raise the rate by 0.1 instead of 0.25? Less panic and endless chatter in the news, and a chance to see how much of a rise you need to have an effect.

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