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Why US Price Inflation Remains Relatively Subdued?

The yearly growth rate of the US consumer price index stood at 1.9% in August against 1.7% in July, while the growth rate of the price index less food and energy stood at 1.7% in August against a similar figure in July and 2.3% in August last year.

Given that the Fed’s target for the core CPI i.e. the CPI less food and energy is 2%, this has  prompted some experts and Fed policy makers to seek answers as to why price inflation remains subdued in the midst of a declining unemployment rate and prolonged economic expansion. The unemployment rate stood at 4.4% in August against 4.9% in August last year and below the so-called natural, or the equilibrium rate of unemployment of 4.5%.

If price inflation hovers too low, it raises the risk of price deflation, which is seen by most experts as bad news. Most experts are of the view that prolonged price inflation below the Fed’s target runs the risk damaging the credibility of the central bank.

We suggest that the main reason for the dilemma as to why the pace of inflation is relatively low in the midst of supposedly strong economic indicators is a misleading definition of what inflation all about.

Contrary to the accepted thinking, the subject matter of inflation is increases in money supply. Note that we do not say that increases in money supply cause inflation. What we are saying that increases in money supply is what inflation is all about.

Contrary to the accepted thinking, the subject matter of inflation is increases in money supply. Note that we do not say that increases in money supply cause inflation. What we are saying that increases in money supply is what inflation is all about.

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