Recent comments from US Federal Reserve members reveal growing concern about low inflation. While growth and employment seem to be going the right way, inflation readings are not.
When the demand side of an economy is severely reduced, as it has been lately due to problems in the US housing market, it should be expected that inflation would fall. But while the Fed hopes inflation will pick up it does not have a rationale for why this should occur, other than the presumption inflation follows growth with a lag. While debate within the Fed rages, the doves have been at least acknowledging what the data is telling us: inflation may contract even further. Further declines in inflation will continue to force “real” interest rates - those above inflation - higher.