The “Scourge” of Low Inflation

According to the world’s major central banks, low inflation is the main problem facing developed economies. Inflation is a measure of the increase in the cost of living, so the problem as defined by Central Banks is that the cost of living is not rising quickly enough.

A recent economic paper by the San Francisco Fed analysed which sectors are to “blame” for low inflation. It concludes that lower healthcare inflation is primary contributor. For most people this would be described as an unalloyed good. The article’s focus is on the drag to inflation from lower healthcare inflation, and how this makes it more difficult of the FED to reach its 2% inflation target.

I can’t help but feel that something has gone terribly wrong in the world of finance and economics for us to have ended up at this point.

The reason for the Central Bank viewpoint is that developed economies have high debt levels and need inflation to reduce the “real” value of debt. The current policy may be justified in the interest of economic stability. The problem is that the cure (low interest rates) just leads to debt levels rising even further.

There is no easy fix for the current predicament. However, economic policy makers have consistently favoured wall street over main street and the current obsession with higher inflation is a continuation of this pattern. We need to get to the point where policy makers are actively looking to reduce the cost of living in order to raise living standards. The world of finance should be a secondary consideration.


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