You can enable subtitles (captions) in the video player
US inflation has been coming in at a lower than target rate since the financial crisis with only a couple of exceptions. But the economy is still growing so what's going on here?
Now the way we measure inflation is to look at a hypothetical basket of items and track the prices inside of that basket. So items can include things like housing, medical expenses, retail, basically anything that you would typically spend money on. Now, the Fed wants the price of that basket to increase about 2 per cent each year. That's because 2 per cent means, OK, the economy is growing but it's not growing so quickly that consumers can't keep up. And at the most recent Fed meeting Chairman Powell said: yes, inflation is low but we think it's because of temporary factors and really it's going to pick back up.
But some economists think that low inflation is actually a result of something more structural, which brings us to today's chart. Now, the top line is the Consumer Price Index or CPI which is that basket that I was referring to a minute ago. The bottom line is the Digital Price Index and it was developed by Austan Goolsbee and Peter Klenow to measure the price of things we buy online.
And you can see that the DPI is much lower than the CPI which is really reflective of an experience that all of us have probably had, which is when you go to buy something online you're going to look for the best price and you'll probably end up going to pay a little bit less. And what this is all really talking about is the idea that businesses are incentivised to have lower prices for goods and services due to things like productivity, technology, globalisation - structural factors that pull inflation down.
Now what about tariffs? This idea that aren't these tariffs that the US and China trade war have been implementing going to increase prices for consumers? Well, businesses get to decide if they want to pass on higher costs to consumers and so it's really up to them. The jury is still out on whether the trade war will increase inflation.
So this low inflation, it could be temporary, like the Fed says, or it could be structural for things like globalisation and technology. And if that's the case then that 2 per cent target that the Fed has may need to be rethought. And that's thanks, in part, to all of us, who just can't resist a good cyber deal.
