The Mystery of the Missing Inflation

Sep 13, 2017 Nouriel Roubini

Since the summer of 2016, the global economy has been in a period of moderate expansion, yet inflation has yet to pick up in the advanced economies. The question that inflation-targeting central banks must confront is straightforward: why?

NEW YORK – Since the summer of 2016, the global economy has been in a period of moderate expansion, with the growth rate accelerating gradually. What has not picked up, at least in the advanced economies, is inflation. The question is why.

In the United States, Europe, Japan, and other developed economies, the recent growth acceleration has been driven by an increase in aggregate demand, a result of continued expansionary monetary and fiscal policies, as well as higher business and consumer confidence. That confidence has been driven by a decline in financial and economic risk, together with the containment of geopolitical risks, which, as a result, have so far had little impact on economies and markets.

Because stronger demand means less slack in product and labor markets, the recent growth acceleration in the advanced economies would be expected to bring with it a pickup in inflation. Yet core inflation has fallen in the US this year and remains stubbornly low in Europe and Japan. This creates a dilemma for major central banks – beginning with the US Federal Reserve and the European Central Bank – attempting to phase out unconventional monetary policies: they have secured higher growth, but are still not hitting their target of a 2% annual inflation rate.

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Nouriel Roubini

Writing for PS since 2007
159 Commentaries

Nouriel Roubini, Professor Emeritus of Economics at New York University’s Stern School of Business, is Chief Economist at Atlas Capital Team, CEO of Roubini Macro Associates, and Co-Founder of TheBoomBust.com. He is a former senior economist for international affairs in the White House’s Council of Economic Advisers during the Clinton Administration. He has worked for the International Monetary Fund, the US Federal Reserve, and the World Bank, and was Professor of Economics at New York University's Stern School of Business. His website is NourielRoubini.com, and he is the host of NourielToday.com.

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0 Comments on this paragraph, 33 Comments on this article

Alex Aslanidis Nov 3, 2017

Global overcapacity, mountains of private debt, gains directed to the rich, yeah, what a mystery. In the meantime, free capital and trade flows mean that no country is willing to run highly enough accommodative fiscal policies because these will "leak" to the advantage of trade surplus countries. So, yeah, let's remain in stagnation. Eventually, after enough pain and "populist" electoral victories, the global paradigm will shift.
A new reply to this comment has been posted.
Nedim Bazdar Sep 27, 2017

Perhaps the gains over the recovery period have accrued to those who are least likely to spend and stimulate an inflationary environment, whilst those who have a larger propensity to spend have missed out over the recovery period?
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Bruce Wilds Sep 19, 2017

Too many people little difference exists between stagflation and inflation, however, the distinction or difference is that stagflation is often linked to times of economic slow growth. The idea that inflation cannot exist in a period of slow growth is a myth that many people believe, this may soon be proven false.

A great deal of what something is worth is related to where people actually put their wealth. The sectors or areas of the economy that savers and investors deem safe are more important than most people realize. The article below explores how what people buy can mask the reality of inflation.

http://brucewilds.blogspot.com/2017/05/stagflation-most-probable-scenario.html
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manuel werner Sep 18, 2017

Growing income inequality means those with a higher marginal propensity to consume are putting less pressure on demand while the very low MPC crowd is putting huge pressure on asset values like yachts, luxury vehicles, mansions and, not to forget the S&P 500. Lower inflation, stimulative policies notwithstanding, is clearly part of the inequality landscape, so it may be better to grow inequality if we really want to put a lock on inflation.
A new reply to this comment has been posted.
Steve Hurst Sep 18, 2017

Not one word about global debt and the expansion of corporate debt concurrent with corporate cash stockpiling and concurrent stock market activity
A new reply to this comment has been posted.
Steve Hurst Sep 18, 2017

There is no shortage of labour so kiss goodbye to your Phillips curve. If a local shortage occurs then displace need overseas, hence there is an infinite supply as far as arithmetic is concerned and the forecast is a population ie workers doubling in 30 years. This is just more nonsense based on models based on a short transitionary period and people trying to live in the past. There is no model, it is like listening to sun worshipers supplicating because of something in the stars
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jose sousa Sep 18, 2017

The problem of upward pressure on prices of risky assets and bubbles is that most of the times they are recognized too late, only when they burst. Till that happens, folks prefer to follow the unfortunate quote "... as long as the music is playing, you’ve got to get up and dance ". It happened in 2008 and regulatory leaders seem to be ignoring that its happening again, namely in the USA. There will be blood one fine day.
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Robert O'Regan Sep 18, 2017

Roubini and his ilk were taught using the tungsten lamp for light; Hudson et al used the LED lamp. Economics is so yesterday requiring a social contract to function. Hudson has a grip....get one.
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Jose araujo Sep 18, 2017

Roubini actually is proving why we know that Shumpeter was wrong,, and the whole creative destruction never exists.

People will hold to their former believes when all the data is against them, they will never admit to have invested several years on the wrong theories, so instead of embracing the obvious, the create complex theories that allows them to keep believing what they believe...

No Mr. Roubini, the lack of inflation is not explained by supply shocks (what ever that is), we have not experienced inflation since 2008 because money velocity is decreasing, and money velocity is decreasing because agents are risk averse and there ws a shift in preferences.

No need do make up stuff, old stuff can perfectly explain what is hapening
A new reply to this comment has been posted.
Jose araujo Sep 18, 2017

MV=PY - the Fisher equality.

Supply side deniers have been proposing for years now that P is not really P, and that inflation numbers have been tampered.

Now comes Roubini saying that after all Y isn't Y, and that the new Y is really a better Y....

What next?
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Greg Hall Sep 17, 2017

This may be true for aggregate inflation, i.e. the CPI. But if you drill in on key market segments and varying regions you'll see that housing and health care suffer from a lot of inflation. Rents relative to wages in many markets are highly inflationary.
- Bruce Wilds Sep 19, 2017
  
  Good point, however. you might add to this the cost of a college education.
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jenselthom Sep 17, 2017

I do not have an Economics background, nor education. However, my visits to the Supermarket, Marshalls, and Ikea -- certainly do not agree with this article.

Everything is more expensive... but not at the rate of 3%

Supermarket prices (except for milk, sugar, bread) are up like 30% in two years.

Marshalls went from an entry point of 8.99 in clothing like shorts and t-shirts, to 12.99

Even Ikea Meatball Plates are up 20%!

Car prices... ridculous!!!! Entry SUV's are up from 20K to 24K

Home prices... ajajajajajajajajaja!!!! that's already above crisis prices.

Salaries, not so much... people I know, have not noticed their salaried keep up with Goods and Services prices...

My POV is not as educated as the rest here, just based on day to day experiences with my wallet...

Also... BANK FEES!!!!! --- Can someone reign Big Banks????
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johnjcarrillo Sep 17, 2017

With a 0% inflation target and real growth of 0% the threat of a deflationary cycle is very real. This is what worries the CBs.
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Keith Johnson Sep 17, 2017

I fear that what we are witnessing is a phase in the massive shift of activity and influence away from the 'West', accompanied by a dearth of longer-term payable projects.

As a Project Economist I have always thought it useful to take a very basic sideways look at interest rates – as reflecting the rate at which a price for funds is struck between savers who need to lend to gain a return and project developers who need cash for ‘real’ entrepreneurial investments.

Of course Macro-Economists will give you a million reasons why this is a wrong crudity. Nevertheless I think that, at times, it can reflect some basic truths. In this case that - in the Developed World or ‘West’ - sound paying projects are very hard to come by - at every level between household and nation.

FOR MORE SEE;

https://kjohnsonnz.blogspot.co.nz/2015/02/limp-string-of-super-low-interest-rates.html

https://kjohnsonnz.blogspot.co.nz/2015/09/will-deflation-and-chinese-mercantilism.html
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Adam F Sep 17, 2017

What's that, we've not had inflation? Brilliant.
In that case, I'll gladly buy Mr Roubini's house from him and pay him the price he would have received in 2008. I'll also buy any government bonds he owns, again giving him the price he would have received in 2008.
What's that, the price of buying somewhere to live is not a cost of living? The cost of a pensioner buying a future income stream on which they'll live is not a cost of living?
Hmmmmm. Mr Roubini has the intellectual honesty of Bernie Madoff.
A new reply to this comment has been posted.
Peter Burgess Sep 17, 2017

I read engineering before studying economics and then becoming a Chartered Accountant and later a corporate CFO. Professor Roubini and most commentators about inflation do not differentiate adequately between cost push inflation and demand pull inflation. Big companies manage their profits and when costs are inflating, then prices inflate and there is inflation that Central Banks cannot control. Think the impact of the oil shock in the 1970s! With modern technology and improved productivity together with global outsourcing, costs have been decreasing and it is possible to have increasing profits without increasing prices. In addition, the characteristics of demand have changed. The Middle Class of North America and Europe is not growing its buying power but losing it, while there is an emerging Middle Class with growing buying power in places like China, India and parts of the Middle East. It also should be noted that while the overall CPI seems to report zero to low inflation, the basket of essential purchases for those with low incomes has been inflating substantially.
Peter Burgess ... http://truevaluemetrics.org
- Jose araujo Sep 18, 2017
  
  Because cost pull inflation (what ever that is) is not relevant. Cost push inflation will never impact all prices, they will impact the prices of the products where the costs went down, the same goes for imported inflation, oil, etc
  
  What we want is the "monetary" inflation, the signs that money supply has been expanding too much, and guess what in this case it hasn't.
  
  The thing is that Mr. Roubini and the other supply sidders, will never admit to that, because that's putting another nail on the supply side cofin.
  A new reply to this comment has been posted.
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Andrew (Andy) Crow Sep 17, 2017

Steve Bull. Unfortunate name because you don't write 'bull'.

Roubini persists with this fiction of there being low inflation. The metrics are nonsense, measuring deliberately distorted figures on unemployment using a system suited to an age of industry which started crumbling decades ago, and calculating inflation as if the only thing that counts is the basket of shopping at Walmart.
The Phillips curve isn't 'flattened'. It's obsolete.
Measure Corporate boardroom remuneration, celebrity and sports star incomes, property prices, equity prices and tell us there's no inflation. The inflation is in the area of the economy (the top) where bank bailouts, ZIRP, QE has been extremely benevolent in forgiving greed, excess and incompetence. Elsewhere there is 'no money'.

It isn't even remotely mysterious and if academic economists can't see it they would have to be so stupid that I doubt they would be able to tie shoelaces. Therefore I can only conclude they are being willfully misleading.

Next time you see an economist check it's footwear. Slip-ons = stupid. Laces = lying.
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Muhammad Ali Nasir Sep 17, 2017

Forecasting inflation under uncertainty requires the understanding of difference between risk and uncertainty. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2968973
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Mauricio Duran-Loriga Sep 17, 2017

Tell Insurance companies, Pension Funds and the like that "new normal" official policy inflation target is 0%, and we will all rush to the screens to short the biggest short ever imagined. Because before sunset all those corporations will lose 90 % of their currently absurd story-of-the-milkmaid prices.
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Angel Gavieiro Sep 17, 2017

I believe there is an alternative narrative to the one proposed by the author regarding inflation and Central Banks behavior:

In the aftermath of the 2008 crisis, and after the public money interventions, effectively facing still a real risk of deflation CBs in Developed Markets embarked on unorthodox monetary policy (QE, ZIRP,...), in my judgment justified given '29 lessons and lack of other levers.

Once averted the deflation risk, they kept pushing the printing press with the aim to reactivate GDP growth, while waiting for fiscal policy to do their bit; but as the latter was not coming (still has not), and the GDP recovery was anemic while CPI inflation was not showing, they kept the foot on the pedal.

Now, as a direct consequence, financial markets have been feeding an enormous bubble, both in equity and bond markets; every market practitioner in a trading floor knows their prices in recent years have been highly determined by CB monetary policy action, and are far from any reasonable fundamentals (a different issue is that it is not in their interest to openly recognize that, although in 2017 quite prominent institutional investors have alerted it).

CPI inflation has not raised because, lacking any real investment push from private sector, the excess liquidity has gone to inflate asset-prices and the reminder circled back via banks' excess reserves in CB balance-sheets.

I believe the low inflation narrative is a red-herring, the real concern for CBs now is how to get gradually and carefully the foot out of the pedal and restore some monetary policy potential capacity for the future (i.e. rates in the 3-5% and deflated balance-sheets) without triggering a market rout that could, eventually, become another 2008 meltdown with all the dire consequences.

That, I believe, is a narrative closer to the the reality.
- larry ripley Sep 18, 2017
  
  What has happened to all the max profits businesses were booking from 2010 until, well a number are still doing it, But while there has been an enormous profitability for most businesses, there has been minimal investment as has already been noted. Businesses are flush with cash after spending all they could on stock buybacks and such. That regular good profitability is what is supporting the stock market. Money, money, money, don't forget the banks are replenished and are actively looking for borrowers. Then there is the matter of some 3.5 or 4 trillion that has been slowly molding in excess reserves while the Fed continues to help grow the big losers capital to help keep it up to snuff while slowly reducing the Treasury balances. It's those 0.25% gifts that keep on earning on those excess reserves that keeps the Fed in firm control.
  
  Where's the money folks and how is it being stored/used, dare I say invested? It's no secret that many firms padded their savings because there was nothing to invest in even when they began to see sales grow. The lengthy time of recovery was somewhat pre-ordained when it became clear Congress had no stomach for doing what needed to be done and the Fed was left to do it while Congress farted and left town.
  
  The problem is that there is an imbalance that has occurred, grows and unless addressed will become and effective GDP suppressor. The imbalance is the wealth imbalance in this country. It is pointing toward an anomaly that is not quite clear. It's just that the basic go to work, earn money from wages, buy life necessities, work hard, earn more money, buy the things that make life enjoyable because your earnings have advanced more than prices and profits have still advanced because of productivity. So as you're working your way through life growing wealthier, soon you're an investor and as an owner you want the best returns to enrich you. What do you invest in if there is no or very little growth and savings pay next to nothing. There is nothing pressing so you just save for a recovery needing investment. With no or very little growth you're not handing out raises. And ten years later it's still about the same so what are doing with the money.
  
  The wealth imbalance has caused an imbalance of investment versus spendable wages. As a whole there should be a ratio range in which each years sum of business incomes devoted to people expenses less the expenses of plant and equipment. That is divided into a percentage to owners and a percentage spent on workers, including executives that should total 100% excluding the expense of plant and equipment. I would expect there is a normal range in which the optimal split is made such that investment gets a percentage that can be slid up and down to the boundaries of the ratio, say 64/40 to 40/60. Too much unemployed money laying around is not going to make for good GDP growth, Knowing if you're in the range is a good start.
  A new reply to this comment has been posted.
- larry ripley Sep 18, 2017
  
  What has happened to all the max profits businesses were booking from 2010 until, well a number are still doing it, But while there has been an enormous profitability for most businesses, there has been minimal investment as has already been noted. Businesses are flush with cash after spending all they could on stock buybacks and such. That regular good profitability is what is supporting the stock market. Money, money, money, don't forget the banks are replenished and are actively looking for borrowers. Then there is the matter of some 3.5 or 4 trillion that has been slowly molding in excess reserves while the Fed continues to help grow the big losers capital to help keep it up to snuff while slowly reducing the Treasury balances. It's those 0.25% gifts that keep on earning on those excess reserves that keeps the Fed in firm control.
  
  Where's the money folks and how is it being stored/used, dare I say invested? It's no secret that many firms padded their savings because there was nothing to invest in even when they began to see sales grow. The lengthy time of recovery was somewhat pre-ordained when it became clear Congress had no stomach for doing what needed to be done and the Fed was left to do it while Congress farted and left town.
  
  The problem is that there is an imbalance that has occurred, grows and unless addressed will become and effective GDP suppressor. The imbalance is the wealth imbalance in this country. It is pointing toward an anomaly that is not quite clear. It's just that the basic go to work, earn money from wages, buy life necessities, work hard, earn more money, buy the things that make life enjoyable because your earnings have advanced more than prices and profits have still advanced because of productivity. So as you're working your way through life growing wealthier, soon you're an investor and as an owner you want the best returns to enrich you. What do you invest in if there is no or very little growth and savings pay next to nothing. There is nothing pressing so you just save for a recovery needing investment. With no or very little growth you're not handing out raises. And ten years later it's still about the same so what are doing with the money.
  
  The wealth imbalance has caused an imbalance of investment versus spendable wages. As a whole there should be a ratio range in which each years sum of business incomes devoted to people expenses less the expenses of plant and equipment. That is divided into a percentage to owners and a percentage spent on workers, including executives that should total 100% excluding the expense of plant and equipment. I would expect there is a normal range in which the optimal split is made such that investment gets a percentage that can be slid up and down to the boundaries of the ratio, say 64/40 to 40/60. Too much unemployed money laying around is not going to make for good GDP growth, Knowing if you're in the range is a good start.
  A new reply to this comment has been posted.
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Thaomas H Sep 14, 2017

The post suffers from two mistakes. 1) There is nothing "mysterious" about inflation failing to equal 2% for any given rate of increase in real activity. There is not theory and no evidence that this is constant over the long term. 2) Central banks are not to be held responsible for asset bubbles if they exist. Their job is to to keep the price level growing at a constant rate so that people can make the best possible decisions about future price levels and relative prices. In addition, in the US, they are to do this together with maintaining maximum employment (probably best though of as employment of all resources not just labor) Central banks have been remiss since 2008 in failing to provide sufficient stimulation to meet these obligations.
- Bruce Wilds Sep 19, 2017
  
  The central banks have already gone way to far in creating new money. Former chief economist of the Bank for International Settlements, William White, told Bloomberg TV recently that "the system is dangerously unanchored." White voiced his concerns such as prices being very high, in particular for high-yield assets and equities, VIX at very low levels, and house prices are rising strongly.
  
  What stood out in my mind was his indication that central banks cannot or will not be able to solve what might be seen as a growing "liquidity problem." White pointed out that Europe's creditors are likely to face some of the biggest haircuts. This is a bit ironic coming at a time the euro is surging ever higher. more on this subject in the article below'
  
  http://brucewilds.blogspot.com/2017/09/former-bis-chief-system-dangerously.html
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Derrick Baragwanath Sep 13, 2017

As a general rule expansionary monetary (pushing money into the economy) will lead to more spending and inflation will follow, unless the economy is growing in proportion to the expanding money supply. There is one caveat: Inflation is measured against increasing prices in consumer goods. If the extra money is going into capital goods that are increasing in price then it will not register as inflation. In the developed world property prices have been increasing and so have share prices. I suspect this is the reason that inflation is not showing up, despite expanding monetary supply.
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ALAN MANAS Sep 13, 2017

It seems to me impossible that none of the readers of project syndicate have a response to these articles giving us old notions of how we were taught the system works. The lack of achieving inflation targets is not a temporary supply shock. Global corporations have learned how to bypass their domestic economic process. Typically, they borrow in their domestic currency and expand their production system wherever they can achieve lower costs or gain access to a market. This may be great for those countries that are on the receiving end, but it is a disaster for the average citizen of the U.S., Japan and Europe. In China 80% of capital allocation is through the banking system. That banking system is controlled by the economic planners. The borrower's lending plans typically need to conform to the long term interests of the state. China just announce domestic content goals for all of manufacturing. My memory is that they will rise from the current 20% to 50% by 2020 and 70% by 2025. Chinese companies can borrow to move low wage production offshore to free up workers for higher wages. The system we have in the U.S. is not working for the average worker. We are not raising the average skill level and we are allowing our companies to hire foreign workers for jobs U.S. citizens could easily fill. If wages are too high the companies need to invest in more technology to offset higher wages. This is not going to stop unless the developed countries take action to offset the control of economic policy by these large corporations. The top 10 campaign contributions go to McCain, the Republican, and to Clinton, the Democrat. The end result is the same.
- Victor Morris Sep 15, 2017
  
  After reading Kissingers book on China it becomes obvious that exporting their deflationary labor costs to the US and coersing the transfer of Western technology to their Industrial base is the reason for no inflation and has severely weakened the middle class in the US and continues for their long term plan to make the US (and World) into a vassel state where China "The Middle Kingdom" albeit peacefully rules the world. The US political short term profit thinking and strategy plays pefectly into this outcome.
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Steve Bull Sep 13, 2017

I would contend that the existence or non-existence of 'inflation' truly depends on where one looks. If we accept at face value the headline inflation statistics, then yes, inflation is muted. If, however, we widen our perspective and look elsewhere there are pockets of very significant inflation. To argue that there is no inflation is disingenuous. The statistics used by governments and uncritically parroted by the mainstream media are highly manipulated and, quite frankly, untrustworthy. Basing monetary policy on such manipulated statistics will certainly create all sorts of 'unintended' consequences.
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