Why isn’t inflation higher?
Date posted: December 30, 2013
There’s been much criticism of the Federal Reserve ‘s policies in recent years, especially among those who say that the amount of money the Fed has created will eventually result in higher inflaction. Why hasn’t that occurred yet? N.C. State University economist Mike Walden responds.
“Two main reasons: … I remember when I took my first economics class, we were taught this phrase, ‘Inflation results when there’s too much money chasing too few goods and services.’ And your point about the criticism of the Federal Reserve primarily is over, as you said, the amount of money the Federal Reserve has created, pushing $3 trillion in last five years. And people are worried about, hey, if that money is deployed and is chasing all those goods and services, why aren’t prices higher?
“Well, one reason — a big reason — is that of the money the Fed has created, actually a large percentage of it, is sitting idle. It’s in the vaults of banks. It’s not been loaned out. It’s not been spent. Therefore, effectively, it is not having impact on the economy.
“Second big reason … is globalization. A company now in the U.S., if it wants to raise prices, in the old days, it would simply have a look around and see what its local competitors were doing and figure, ‘All right, I can raise prices. I won’t lose that much business.’ Now that company has to worry about international competition, and so that international competition is really keeping a lid on inflation.
“Now, down the road, some people see the Fed having to retreat — if you will, pull back some of that money it’s created — a lot of that, again, in the vaults of banks. If that is done effectively, that really will head off many dangers of future inflation being higher.”
Category: Economic Perspective