Who killed US inflation? Here are the suspects in Janet Yellen’s mystery
Was it the seamstress in Bangladesh, with her low wages? Or Jeff Bezos, with his low prices?
Federal Reserve Chair Janet Yellen has labelled this year’s unexpected inflation slowdown a “mystery,” and there are a few possible suspects.
Previously, factors such as labour-market slack, falling fuel costs and cheap imports explained why price gains weren’t headed toward the Fed’s 2 per cent goal. Those explanations no longer hold as much water. Joblessness has dropped to 4.4 per cent, the dollar is falling and energy prices have stabilised. A pricing issue with cell-phone plans earlier in the year no longer explains the broader slowdown.
If inflation is an enigma, why? Shadow labour-market slack could be causing the delay by holding down wage and price pressures. But other — and more persistent — perpetrators could be at work: globalisation, technological disruption, and demographics, to name a few. Here’s the lineup.
Labour-force participation remains depressed relative to its pre-crisis norm, but most economists think that’s the product of slow-burning demographic changes. If they’re wrong, and some share of the decline is related to economic weakness, companies may still be able to tap an additional pool of potential workers. That could be enabling them to keep wages low, both allowing them to maintain profit margins without raising prices and reigning in consumer demand.
Yellen may have Jeff Bezos — the billionaire founder of Amazon.com — and his contemporaries to thank for 1.4 per cent price gains. The Amazoninflation theory goes like this: Online marketplaces have enabled consumers to buy the products we purchase most at the lowest prices possible with the click of a button. Because consumers can seamlessly switch to a competitor’s product if one seller hikes prices, this leaves stores without much pricing power. Gone are the days of buying something offthe-shelf at a markup because doing so is more convenient than shopping around.
It’s possible that a more globalised labour supply is holding down wages and inflation. The specific title and country is an oversimplification here. From factory workers in Bangladesh and China to coders in Canada, it’s become increasingly easy to outsource work thanks to technology and integrated global supply chains. That means that in the face of a labour shortage, companies could choose to move workers overseas before raising wages.
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