The era of decades-long low inflation may be coming to an end. The recent OECD report shows that inflation in 32 of its member countries is ahead of March’s rate. Although this trend has been steady, it is still a cause for concern. Inflation may be headed upwards, especially in advanced economies, where prices tend to rise slowly but steadily.
The federal reserve set a target for 2% inflation for the long-term. The goal is to keep inflation around this target, but sometimes it allows inflation to rise or fall. As of June 2017, headline inflation was 1.4 percent. This is higher than it has been in over 30 years.
Despite this rising trend, the U.S. economy has been undergoing a maturing process since the shock from the oil price and the collapse of the dollar standard. As a result, manufacturing has been moving to Asia and services have been transformed by technology. These changes have resulted in increasing productivity. Consequently, better products can be sold at lower prices. While rising unit labour costs pose a threat to the economy, they are largely local in nature.
There are several reasons to be concerned that the era of decades-long low inflation may be coming to an end. The collapse of Bretton Woods and the decline of the gold standard was a key factor in the Great Inflation. Both of these factors contributed to the slowing down of the economy. The Federal Reserve had aimed to lower unemployment by chasing the Phillips curve. After two years, the domestic and foreign supply chains had begun to normalize. Meanwhile, consumer demand had leveled off, and private fixed investment began to decline. This caused a mild recession and lowered real GDP by 1.5 percent.
