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What low inflation means for the economy

Chris Farrell Dec 30, 2011

Adriene Hill: Here in the U.S., we’ve heard about and felt our own inflation. Rising food prices, and metal prices, and prices of the things we don’t usually even think about — like cotton. But now, as the year winds down, inflation seems to be slowing a bit.

For more about why that matters, we turn now to Chris Farrell. He’s Marketplace’s economics correspondent. Good morning Chris.

Chris Farrell: Good morning.

Hill: So where are we with inflation right now?

Farrell: Well as you know, there’s lots of numbers that touch on inflation, but just to highlight a few: Consumer Price Index, Producer Price Index, the Personal Consumption Expenditure Index — they’re all showing that the inflation gauges are relaxing. They’re coming down in the second half of the year as we enter into 2012.

Hill: And how does that — and maybe how should it — play into policy decisions right now?

Farrell: I think one thing that’s going to play into, I don’t know about you, but the sort of criticism of the Fed has been kind of muted? So it might make it easier for the president — he’s nominated two people to take empty seats on the Federal Reserve — might be easier to get those nominations through. I think that it gives the Federal Reserve a lot more room to maneuver in terms of keeping interest rates low, and then perhaps embracing some sort of program to provide some support to the economy in 2012. So basically, it’s a more relaxed atmosphere, gives the Fed room to maneuver, gives some support to the economy.

Hill: And how does it matter to me and you?

Farrell: It matters in a lot of ways: First of all, I don’t think it’s quite coincidence that we’ve had an improvement in consumer confidence as the inflation numbers come down. I mean, people really hate inflation. The fact is, when inflation is high and rising, your dollar just doesn’t buy as much. So we feel a little better with low inflation. The other thing is, the Federal Reserve is the only game in town. So with all the problems in Europe, the questions about ‘Will the eurozone crack up in 2012 or not?’, ‘Will this economy gain traction?’, the Federal Reserve has room to maneuver with low interest rates and with low inflation.

Hill: Chris Farrell, thanks so much.

Farrell: Thanks.

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