"It’s one of the major challenges of our time, really, to have inflation, you know, downward pressure on inflation let’s say."

The title of this post is part of a statement from Fed Chairman Powell, from a press conference, recently quoted by Tim Duy. And of course quoted by me the other day, because it was funny.

I want to say #1 that if it was me at a press conference, the quotes would be so bad they wouldn't even be funny. So I sympathize with Mr. Powell, and he has my respect.

Be surprised, I don't care. Let's consider what he said. He said downward pressure on inflation is one of the major challenges of our time.

It is. And by focusing on it, Powell was perhaps trying to bring this challenge, this downward pressure on inflation, bring it front and center.

A major challenge to explain it, I think he means. Hold that thought.


On my old econ blog, one of the first posts that I wrote was The Big T: How to prevent inflation when the Fed prints a trillion dollars. March, 2009.

In that post I had a good laugh when the Fed said they would "employ all available tools ... to preserve price stability." And I wrote

The phrase "preserve price stability" seems to mean the Fed will fight inflation. But it really means the Fed will fight deflation.

I quoted Glenn D. Rudebusch of the San Francisco Fed on "unconventional strategies":

"A transparent commitment to a positive inflation objective may help prevent inflationary expectations from falling too low, which could help forestall any excessive decline in inflation directly."

By "a positive inflation objective" Rudebusch meant keeping inflation up, not down.

That was in 2009, when Ben Bernanke was Chairman of the Fed. Ten years have gone by. What started as a "commitment to a positive inflation objective" has grown into a focus on "one of the major challenges of our time". And the attention level has moved up from Rudebusch (presently Executive Vice President and Senior Policy Advisor at the San Francisco Fed) to Jerome Powell, Chairman of the Federal Reserve.


So basically, we still have the same problem we had ten years ago: downward pressure on inflation. And as I understand Chairman Powell, we still need to explain this downward pressure.

The simplest explanation is best, right? Recall this, from Alan Blinder:

At any given moment, there is a core inflation rate toward which the actual inflation rate tends to gravitate. This rate is determined by fundamental economic forces, basically as the difference between the growth rates of aggregate demand and aggregate supply.

If Blinder is correct, then we can explain the downward pressure on inflation as a case of low aggregate demand. It is the sort of thing that might arise from a permanent policy fixation on the supply side.

How to explain the downward pressure on inflation? Maybe the economy is just slow. Slow, not since 2008, not even since 2001, but slowing persistently since the mid-1970s. Scott Sumner, for example, says: "I am not denying that growth in US living standards slowed after 1973, rather I am arguing that it would have slowed more had we not reformed our economy [in the 1980s]". And Tyler Cowen, in Stubborn Attachments, mentions "the great stagnation, a slowdown in growth which overtook the Western world starting in about 1973."

Look at Capacity Utilization: trending down since the start of the 1974 recession; but flat or possibly up-trending before that recession. What better measure can there be, of the difference between the growth rates of aggregate demand and aggregate supply?

The economy slowed after 1973, and would have slowed more in the 1980s if not for Reaganomics. It slowed more after the 2001 recession, and slowed more again after the 2008 recession. Oh, and there was one brief burst of vigor in the latter 1990s.

The economy is just slow. Think about it: With all this great new technology we have, and with the people who don't like it mostly retiring out of the workforce, shouldn't "the new economy" be giving us more of the high productivity and low inflation that Alan Greenspan observed in the 1990s? With all that technology, shouldn't we reliably be getting 4% annual growth, or better? Well, we're not. The economy is slow, and has been slowing for something like 45 years.

Our economy is just slow. Aggregate demand is down. That's the reason we have not been getting the inflation economists expect. That's the reason there is "downward pressure on inflation". That's the simple explanation.