Inflation Assignment: Low Inflation Around The World
Question
Task: Write a report on inflation assignment answering why is inflation so low and how do you think it will remain so over the next five years.
Answer
Introduction
According to the research on inflation assignment, inflation in the past years has been seen to decline even below the planned inflation lowest level of 2% creating a pressure on the economy. This is because inflation that is too low also proves to be costly for the economy. This is because low inflation or deflation is seen to complicate the conduct of monetary policy. This is because when the inflation goes below 2% it becomes difficult for Federal Bank to implement effective monetary policy (Samuelson 2020). Moreover, low inflation is a high signal of economic malaise and causes distortions. The inflation rate below the planned 2% target would mean that the monetary policy is unable to control the inflation or its commitment to control the inflation is not strong. The inflation assignment analyzes the reason behind low inflation that has been a situation of concern in almost around the world such as US, Japan and others.
Discussion
It is stated in the inflation assignment that inflation is bad for the economy and high inflation can prove to be disastrous if not controlled in time. However, a moderate inflation also prove to be beneficial for the nation because there are various reasons behind not maintaining low inflation. Inflation less than moderate value of 2% would mean that the monetary authority of the nation is unable to control the inflation under them by controlling the money supply in the economy (Samuelson 2020). Moreover, inflation less than moderate value would mean that the economy can go under deflation and face all the negative impacts of it such as declining prices and wage rate and a weak economic condition overall. An example of low inflation that is faced in the part years is Japan that has put the economy under low inflation stagnation or low inflation trap. The economy has to consider various kinds of different indexes when measuring inflation, however, Fed takes into consideration personal consumption or spending with the help of Federal Open Market Committee. The problem of low inflation is not the only problem in Japan and USA, however, has been the problem around the world and is calculated with the help of CPI. Most of the countries have CPI less than 2% showing a low inflation (Stlouisfed 2020).
According to the readings ofStlouisfed (2020) considered in the inflation assignment there has been number of reasons behind the low inflation in various wealthy nations around the world. One is technological progress and robotics that has shown growth in the recent years. Most of the robotics and technological progress that impacted the wage rate in the economy and reduction in employment. The threat is high on labor intensive businesses that has changed their way of operations. The past decade has seen low inflation due to remarkable growth in telecommunication, computer and other innovations that has elevated productivity and has suppressed the cost of labor. This has been the major reason behind reducing the inflationary pressures in nations. Moreover, in such circumstances it is seen in the inflation assignment that there is a reduction in the price of products that make use of new technologies and can be produced in low cost and bulk amount. For example, smartphone is replacing many other costly devices such as cameras, where the people can accomplish number of task with one smartphone. This has reduced the price of television and photographic equipment. In addition to this, the increase in the productivity of labor using advanced technology has led to the reduction in labor cost. This is because there has been easy access to information, better communication and application of various softwares (Conti et al. 2015). The graph provided below within the inflation assignment shows the relationship between labor productivity and CPI that shows that as labor productivity increases CPI also increases. This is seen from the downward trend in the labor productivity and CPI relation.This shows technology has been one of the reasons behind low inflation in the world economy.
Figure 1- Relationship between labor productivity and Inflation
Source- (Stlouisfed 2020)
In addition to this, the other reason for low inflation discussed in the inflation assignment in the world economy is demographic transition where the population in the world is seen to live longer lives and has caused an upward shift. This is because there is a negative relation between average inflation and average old age dependency ratio. This means that as dependency ratio increases the inflation rate falls. This is because as the old workers increases in the economy it is seen that they enter the entry level jobs and has an impact on the wages of young workers causing a deflationary or low inflation pressure in the long run (Conti et al. 2015). This shows that changes taking place in demographic ratios is creating a low level inflation in the economy.
Figure 2- Relationship between old age dependency and Inflation
Source- (Stlouisfed 2020)
One of the major reasons of low inflation in various economies can be due to independence of Central Bank andtight monetary policy. Monetary policy aims at influencing the money supply in the economy impacting aggregate demand of goods that directly has an impact on prices of goods and services. Inflation has been the primary objective for planning monetary policy and the policy is always targeted towards reducing inflation in many countries. This has resulted in the reduction of inflation below targeted level of 2% in nations because tight monetary policy has reduced the money supply in the economy and in the hands of people that create demand (Stlouisfed 2020). The graph mentioned below in the inflation assignment shows that independence of the Central Bank to manage the monetary policy and reducing or increasing the money supply in the economy has negative relation with inflation. This means that as Central Bank such as Federal Bank reduces money supply through monetary policy using different instruments.
Figure 3- Relationship between independence and Inflation
Source- (Stlouisfed 2020)
Analyzing at the lowering inflation rate in developed and developing countries in the world and the reasons behind it shows that the inflation rate will stay low for coming few years as well. The growth of technology has broken the relationship between unemployment and inflation. This is because even with low unemployment the wages are not growing at a faster rate. The companies are doing most of their operational works through technology or robotics and there is less labor work. This is keeping wages low for lower-paid workers. Moreover, the progress in technology will not stop with the rise in globalization (Hanlom 2019). This broken relationship between inflation and unemployment identified in the study developed within the inflation assignment will be the major reason that will keep inflation rate low for coming five years. In addition to this, it is seen that aging global population is a phenomenon that cannot be controlled either. This is reducing the pressure of worker entering the work force and increasing the number of people entering the retired classification. This has less impact on the prices and this may keep the inflation rate lower in the coming five years as well (Krugman, 2014). This is because changing the population composition is a difficult thing to change and this will not put upward pressure on wage rate to improve inflation.
Krugman (2014) with regards to the case scenario of inflation assignment has stated that debt loads in the nations are increasing all around the world and this is accompanied by lower GDP. In such circumstances the inflation rate in the nations are lower due to low demand in the economy. Thus, managing the rising debt and lowering GDP is a challenge in next five years because it is quite a short term to curb the rising debt scenario. The rising trend taking place with globalization is huge influence of e-commerce on people. The internet economy has been the major reason for exerting downward pressure on prices. Similarly robotics and artificial intelligence has made internet retailer to improve their efficiency and virtual storefronts. This is yet another reason of low inflation that is difficult to control because of rising internet development in the world economy. These trends illustrated in the inflation assignment seem difficult to reverse and may even increase in the coming years. This means that the phenomenon of low inflation will persist for a long term due to such factors. This shows that the inflation will remain low in the next four to five years because or uncontrollable factors that is out of the hand of Central Bank to control (Hanlom 2019). The world economy is changing in its own pace with new advancements and new demands and controlling it is not easy and simple.
Conclusion
From the above analysis on inflation assignment it can be concluded that inflation has been low in many nations around the world due to several factors that are irreversible such as technological development, tight monetary policy, lowering labor cost and others. Due to such factors the case of low inflation explored in the above context of inflation assignment will remain in the same in the next five years because controlling such factors and trends is not in the hand of the national bodies and the Central Bank. Moreover, low inflation is bad for economy because it signals that the demand for goods and services are lower and in turn brings down economic growth and depress wages. In some cases it can also lead to recession and unemployment. However, the reason behind low inflation is difficult to control given the situation of rising globalization in the world. The situation will remain the same for long term with lack of effectiveness of central bodies.
References
Conti, A.M., Neri, S. and Nobili, A., 2015. Why is inflation so low in the euro area?. Bank of Italy Temi di Discussione (Working Paper) No, 1019.
Hanlom, S., 2019. Inflation Will Remain Low For Years. [online] Forbes. Available at:
Krugman, P., 2014. Inflation targets reconsidered. Inflation assignment Navigating Monetary Policy in the New Normal, 8, p.110.
Samuelson, R. J., 2020. An economic mystery: Why is inflation so low?. [online] Washingtonpost. Available at:
Stlouisfed., 2020. Why Is Inflation So Low?. [online] stlouisfed. Available at:
