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By Bilal Hafeez 18-07-2019

Why Is Inflation Low Globally? (Federal Reserve Bank of San Francisco, 7 min read)

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The San Fran Fed tries to recover the reputation of the Phillips Curve, but struggles to find a relationship between the unemployment rate and inflation across either developed or developing countries. They do find that inflation expectations play a significant role in influencing inflation in developed countries, while past inflation plays a significant role in affecting future inflation in developing countries. But all countries have suffered from falling inflation, which can’t be explained by the Phillips curve. San Fran Fed pins this down to common underlying factors, such as increasing trade openness, global supply chains, and greater capital and investment flows across countries, which have been pulling down prices even before the 2008 crisis.

Why does this matter? This work suggests larger structural forces are dominating the path of inflation, and so central bank actions are unlikely to have much impact on inflation. Instead central banks may simply be influencing financial markets rather than the real economy. 

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