ECONOMY/TRUMP AS PRESIDENT: “Leading central banks plan to withdraw some of the stimulus measures they have put in place since the financial crisis. But their timing seems a little puzzling: Inflation, which is already below their targets, is falling world-wide.
The decline in inflation is a mystery since the global economy appears to be growing at a faster pace than during recent years, while unemployment rates continue to edge lower.
According to central bankers, inflation is generated by the gap between the demand for goods and services and the economy’s ability to supply them. When that output gap is wide, inflation is lower, and when it is narrow, prices grow more quickly. Low inflation is a symptom of a weak economy, something they want to avoid as much as high inflation, a sign of an overheated economy.
To boost inflation, central banks stimulate demand by lowering interest rates, encouraging households and businesses to borrow and spend. As the volume of goods and services that people want to buy nears the limit of the economy’s capacity to supply them, wages rise, as do prices, generating inflation.
But try as they might, central banks have been unable to reach their inflation targets over recent years, despite their success boosting growth and lowering jobless numbers. That has raised questions about the reliability of the traditional link between the output gap and prices.”
-Paul Hannon and David Harrison, “Central Banks Looking to Reduce Stimulus Face Quandary of Falling Inflation,” The Wall Street Journal online, July 9, 2017 08:03am