U.S. Economists Puzzled by Low Inflation

Relatively few U.S. economists expect deflation. So they don't look for signs of its development.

That's why they're puzzled that the U.S. inflation rate remains below 2% despite robust hiring and an improving unemployment figure.

Read this excerpt from ABC News (Jan. 12):

Month after month, U.S. hiring keeps rising, and unemployment keeps falling. Eventually, pay and inflation are supposed to start surging in response.

It's not happening.

Last month, employers added a healthy 252,000 jobs — ending the best year of hiring since 1999 — and the unemployment rate sank to 5.6 percent. Yet inflation isn't reaching even the Federal Reserve's modest 2 percent target rate. And paychecks are barely budging. In December, average hourly pay actually fell.

Economists are struggling to explain the phenomenon.

"I can't find a plausible empirical or theoretical explanation for why hourly wages would drop when for nine months we've been adding jobs at a robust pace," said Patrick O'Keefe, chief economist at consulting firm CohnReznick.

Normally, with unemployment this low, the Fed would raise its benchmark interest rate to prevent inflation from spiking and the economy from overheating. Not this time.

As long as inflation stays consistently below its target, the Fed might feel pressure to delay a rate increase beyond midyear, when most economists have predicted a hike.

When the U.S. economy last enjoyed a similar hiring binge, in 1999, average wages climbed 3.6 percent, compared with 1.6 percent last year, according to the government.

A developing deflationary trend is the "explanation" for the subdued U.S. inflation rate.
The article offers other explanations. You can read them by following the link below:

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