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Why Inflation Is So Low


And the new inflation numbers came out this morning. They show a slight uptick in inflation. But as we've seen for some time now, it remains relatively low. This is despite the fact that over the last few years the US Federal Reserve has created trillions of dollars out of thin air. Trillions of dollars. Jacob Goldstein from our Planet Money team wanted to know why hasn't all that new money led to more inflation.

JACOB GOLDSTEIN, BYLINE: The classic Econ 101 explanation for inflation boils down to this: Too much money chasing too few things. For example, say the Fed creates all this money out of thin air and people go out and buy new cars. You probably don't need an economist to tell you what happens next. But I got one anyway.

BILL SILBER: More people buying cars leads companies like General Motors and Toyota to raising prices.

GOLDSTEIN: That's Bill Silber. He wrote a book about former Fed Chairman Paul Volcker. And he says, when companies start selling lots of stuff, and raising their prices, it's easier for their workers to get raises. And when the workers get raises, they go out and buy more stuff. So companies raise their prices some more. But this has not happened over the past few years, despite the fact that there's all this new money out there.

Why not? Part of the reason, Silber says, is that all that newly created money is not in the pockets of ordinary people who could go out and spend it.

SILBER: It's just sitting there in the banks. As long as it sits there, it's not dangerous.

GOLDSTEIN: The banks aren't lending much. Today, nearly six years after the financial crisis the economy still hasn't fully recovered. Millions of people are still unemployed. And Joe Gagnon, an economist at the Peterson Institute, points out even people who do have jobs can't just walk into the boss's office and demand a raise.

JOE GAGNON: For most people in most industries, the boss would say: Well, I'm sorry I can't really afford to give you one right now, our sales aren't that great. And to be honest, we've got a lot of qualified applicants, you know, who want to take your job.

GOLDSTEIN: So wages are stagnant. Goods aren't flying off the shelves. Companies can't jack up prices. And inflation is just creeping along at a low level. That's most of the story, anyway. But there is this one other weird, interesting piece: Inflation today is low partly because people aren't that worried about inflation.

Quick trip to Times Square in New York.

BEVERLY HUSTICE: I don't think we're thinking about it. I'm sure it's happening - we're just not seeing it. It happens so incrementally that we don't see it.

JOHN ADAMS: I don't think inflation at the moment is a concern.

ANN ZIEGLER: I don't know how much it's happening now, or if that's having a huge impact on our prices.

GOLDSTEIN: Beverly Hustice, John Adams, and Ann Ziegler are three random people I found on the street. And the way they, and all the other random other people on the street think about inflation, actually has an effect on what happens with inflation. Sure, people always complain that things are getting too expensive. But when people are really worried about inflation, they start acting differently.

Back in the late '70s and early '80s, when inflation in this country was around 10 percent, people expected prices to keep rising quickly. So, Bill Silber says, they rushed out to buy stuff before prices went up even more.

SILBER: I'm going to buy a car for $5,000. Back then, that's what it cost - believe it or not. I'm going to buy a car for $5,000 because if inflation is 10 percent a year, next year it's going to cost $5500. So I'm going to buy today.

GOLDSTEIN: Cars are flying out of the showroom. Car companies raise prices - boom, high inflation. Today, on the other hand, people are not rushing out to buy stuff.

Here's Cynthia Buda, one last person I talked to in Times Square

CYNTHIA BUDA: If I can afford it and pay cash for it, I'm going to do it. If I can't then I'm a little more hesitant than I would have been 20 years ago. I would have just slapped it on a credit card.

GOLDSTEIN: That is what low inflation sounds like.

Jacob Goldstein, NPR News.


MONTAGNE: And we'd like to thank you for listening to us this morning on your Public Radio station. Keep listening, there are a lot more stories to come.

And this is MORNING EDITION from NPR News. Transcript provided by NPR, Copyright NPR.

Jacob Goldstein
Jacob Goldstein is an NPR correspondent and co-host of the Planet Money podcast. He is the author of the book Money: The True Story of a Made-Up Thing.
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