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Why Is Inflation Still So Low in the US?

When we look at the last decade, we can see some significant changes taking shape in the US economy.  For a good portion of this time, we have seen a rising unemployment rate and falling consumer inflation levels.  These are troublesome trends that have only started to get better in the last couple years.  But it is important to remember that economies do work in somewhat predictable cycles, and no negative trend can last forever.

In fact, it should be remembered that low inflation levels mean that consumer goods are still cheap and that there is no immediate need for the Federal Reserve to raise interest rates to high levels.   For these reasons, it is still a good time for US consumers to make large purchases before prices start to rise once again.  Here, we will discuss some of the reasons we continue to see low inflation levels in the US.

Sluggish Jobs Market

Despite the recent progress that has been seen in monthly jobs figures and the national unemployment rate, we are still in a relatively sluggish phase when compared to the historical averages.  Labor markets will not be considered “healthy” until we are able to get unemployment rates down to about the 4% area.  This is still some ways off, so we can expect these trends to continue for most of this year.  When fewer people are working, fewer people are making large purchases.  Companies are well aware of this, and they understand that it would still be difficult (or impossible) to charge higher prices for their items.

Until these trends change, we are unlikely to see many changes in the underlying inflationary pressures present in the US economy.  Those looking to make economy forecasts for when consumer inflation will truly start to make gains will need to pay special attention to the labor market, as this holds the most critical key to solving the puzzle.

The Stronger Dollar

Another factor to consider is the stronger US Dollar.  Trends in these areas have not strong dollarreceived much press in the regular news media — but the US Dollar has actually been making significant gains over the last year.  The EUR/USD forex pair has hit long-term lows near 1.17, which means that $1.17 US Dollars will buy one Euro.  This is the strongest the Dollar has been in quite some time, and this can have a significant impact on the prices that are seen for export markets.

When the Dollar is strengthening, it is actually much cheaper to buy goods from foreign countries (such as China).  Since the export costs are cheaper, the final costs to consumers are also cheaper — and this is another factor that is keeping inflation levels low in the US.

In all, these are issues that will need to change before we can start to expect rising inflation in the US.  Of course, no economic trend can last forever — so it is only a matter of time before we start to see changes in these areas.

 

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