Financial Planning Update
The Facts Amid Rising Fears Of Inflation
Published Wednesday, February 17, 2021 at: 12:58 PM EST
For nearly a decade, the Federal Reserve was consistently wrong about inflation because inflation is hard to predict.
Now financial cable TV stations are stoking inflation fears. Here are key historic and current facts about inflation to consider when you hear the scary inflation talking heads on TV.
Led by Ben Bernnke, Janet Yellen, and in the early tenure of current chairman Jerome Powell, the central bank every year steadfastly forecast that inflation would rise to 2%, and every year from 2010 to 2018, the Fed was wrong.
In 2018, the Fed inverted the yield curve fearing inflation and nearly caused a recession in 2019. After that, the Fed lowered rates repeatedly and abandoned its 2% forecast for inflation.
The U.S. over the decades – stretching back for the last 150 years – mostly experienced an annual inflation rate of 2% to 3%, until the spike in the mid- and late-1970s.
The inflation pressures of the 1970s are not present now and current trends in the world are anti-inflationary.
For example, Amazon’s business model has reduced prices on consumer goods. Its online store can afford to operate on razor thin profit margins because its main business is selling high-profit internet infrastructure, Amazon Web Services. Amazon and other internet-based vendors have caused disinflation in recent years.
On January 27, 2021, Fed chairman Powell reiterated that the Fed would tolerate an inflation rate higher than its 2% target. “With inflation running persistently below 2%, we will aim to achieve inflation moderately above 2% for some time so that inflation averages 2% over time.,” he said.
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