U.S. Inflation Remains Low, and That’s a Problem
One theory, popular among conservative economists, is
that the Fed causes inflation by increasing the supply of money faster than the pace of economic growth.
The Federal Reserve Bank of Atlanta, which predicted the economy would expand at an annualized
pace of 4 percent in the second quarter, now estimates second-quarter growth was 2.5 percent.
The Federal Reserve thinks modest inflation has important economic benefits,
and it has aimed since 2012 to keep prices rising at an annual pace of 2 percent.
She and other officials also have noted that the weakness of the global economy allowed the United States to import foreign goods at low prices.
But the evidence suggests people enjoy the illusion and, importantly, they respond to the illusion by behaving in ways
that increase actual economic growth, for example by working harder.
Ms. Yellen has attributed the recent weakness to declines in the prices of particular goods, like cellphone-service plans
and prescription drugs, that are not likely to continue.
