Explaining the inflation puzzle

Inflation in the U.S., as Janet Yellen explains, is behaving differently than it did in the past, challenging standard economic theories and contributing to the Federal Reserve’s decision to keep interest rates unusually low even as unemployment has fallen to a 50-year low.

In the 1960s, low unemployment pushed up wages and consumer prices. In the 1970s, high oil prices sparked self-fulfilling beliefs that other prices would rise rapidly. In the 1980s, a severe recession with unemployment that peaked at 10.8 percent brought inflation down from historic highs.

In contrast, inflation has been low and relatively stable in the last three decades. Inflation, excluding food and energy prices, fell and remained below the Fed’s 2 percent target during the sluggish recovery from the 2007-9 recession.

This raises a few big questions: What explains the changes in inflation trends? Is this a temporary phenomenon or a long-lasting one?  And how should monetary policy respond? This report summarizes answers to those questions offered by several prominent economists at an event convened by the Hutchins Center in October 2019. For video of the event and a transcript, click here.