Here is the Chicago Fed Letter circa 1988. Makes for fascinating reading


Category: Inflation, Think Tank

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4 Responses to “1988: Why is inflation so low?”

  1. Willy2 says:

    Interesting document. It has major flaw, it focusses on the labormarket only. That’s only one part of the inflation equation.

    A weak(ening) USD also increases inflation. Take e.g. oil. It went up from $ 20 in 2001 to $ 140 in mid 2008. That’s a sevenfold increase (In USD !!!!) in seven years. But in the same timeframe the EUR/USD doubled from ~ 0.80 to 1.60 (june 2008). That meant that in EUR the price of oil went up a “mere” 3.5 times.
    General commodity price inflation in the US also was double what is was in the Eurozone. See what happened to the CRB index (in USD !!!) from 2001 up to 2008. Commodity price inflation in Europe was only half of what is was in the US. Again, think rising EUR/USD.

    Now apply the story above to 1970s. During the 1970s the USD continued to weaken against the german Mark. Again, that meant that inflation in Europe in the 1970s was significantly less than in the US.

    What also helped to push inflation lower in the 1980s was that oil priced came down from ~ $ 40, 45 to $ 20 in 1990.

  2. Willy2 says:

    There’s another good set of reasos why inflation was so low in the 1980s.

    In th 1950s, 1960s & 1970s US workers enjoyed healthy wage increases. But it also pushed up the price of US production. It made them un-competitive against non US companies. Those rising production costs in the 1970s were masked by a weakening USD. But then two unpleasant things happened:
    - Real interest rates became positive in 1979/1980 (after being negative in the 1970s). That’s a REAL killer for corporations that borrow money.
    - the USD went up from ~ 1980 up to ~ 1984.
    It exposed those high US laborcosts. US companies responded to this in two ways:
    - move production to countries with lower wages (Mexico, South East Asia and later China)
    - keep a lid on future wage increases.
    - started to restructure their operations.
    Keeping a lid on wage increases also meant that US workers faced tough choices. It resulted in that more US labor intensive production moved to countries with lower wages. As a result the emphasis shifted from a production based economy to a more service based economy. And in service based economy, unions have much less bargaining power. And therefore less inflation as a result of lower wage growth.
    But it also spurred another development. Continuously rising costs (food, energy, taxation (!!!)) in combination with falling purchasing power of the average wage and the growing costs of raising children, forced more and more women into the workforce. In the 1970s & 1980s women had the skills to get work and wanted to work. But already in the late 1980s and onwards women were simply forced to join the workforce in order to earn a decent household income.

  3. Angryman1 says:

    The US is using the Euro as a cover exporting “deflation” to Europe. Hence, massive capital flight from Europe to the US, which is driving real rates negative in local and regional US markets. This is essentially sucking up the overcapacity by reducing prices and making goods more affordable to the consumer. As confidence grows, so will jobs. Unlike the last 2 years, the “spring slowdown” domestically has been weaker in 2013. I expect the jolt in Q3 to be quite impressive, more impressive than the last 2 years. Will lead to sig. drops in unemployment “data”(along with upward revisions) and end the US recession. This basically the opposite of the last expansion when real local and regional interest rates were to high creating huge gaps in the economy while the “reits” areas booming out of control making the numbers look good, but the overall economy was quite sick.

    That is why, if the Eurozone falls apart, so does the US recovery then boom. Thus, we don’t blame Germany, France or the Dutch for what is going on………..

  4. boveri says:

    The most important influence on inflation was the dramatic firing by President Reagan of over 11,000 air-traffic controllers very shortly after they went on strike in August 1983. Ask any CEO of that era and if pressed, because no one wants to be thought of as anti-worker, he will tell you this gutsy move by Reagan gave them all courage to fight against unreasonable wage and union demands. And not least this knocked the pins out from under organized labor.
    If you don’t believe this, aside from various teacher and public service unions since that time, you will not be able to come up with a significant economy-disabling strike against any industrial company since the litttle-talked-about putdown of labor by Reagan in August of 1981.