Economics: Is The Inflation Rate Really Too Low?

 (Drivebycuriosity) - If we believe the Federal Reserve then the current inflation rate is too low. They believe that a low inflation is a problem (inflation). I don`t think so, the inflation rate is low for 2 reasons.

1. The prices for energy - oil & natural gas - don`t rise as much as they often did in the past (chart below). Fracking in the US raised the global supply of oil & gas, reduces the power of Opec and keeps a lid of energy prices.

( source )




2. The 2 charts below show that prices for services - especially education & health care - are climbing fast, but that the prices for many manufactured goods are falling and so are partly compensating the rising service expenses.

The prices for manufactured goods, but not so much for services, are subdued by ongoing automation & technological progress which raises the productivity of the manufacturer.  I think that the low inflation rates are - at least partly - caused by the Internet, automation & other aspects of the technological progress. Computers and other electronics have been getting cheaper all the time. In many industries are rising labor costs compensated by automation - at least partly. New technologies are reducing the costs of producing & distributing stuff and therefore curb inflation. And many consumer goods are kept cheap because Amazon and other E-Commerce companies are getting more & more efficient which translates into cost savings and lower prices. I call this the Amazon Effect because the e-commerce pioneer is the bellwether of this development.

Since going online Amazon has been been obsessed with efficiency, cost cutting and delivering goods cheap, fast & reliably. They have been constructing a network of huge fulfillment centers which are very efficient and save a lot of costs. Customers spend muss less money & time when they get things delivered at home. Amazon`s rapid growth forces competitors like Walmart,  Target & Costco to act similarly and to become more efficient & to curb their prices as well (Amazon Effect). Today Jet.com, owned by Walmart, and many other e-commerce companies are competing with Amazon which forces them all to sell at low prices.  Even Google & Facebook are participating in the battle for the online customer. As a result everything what can be ordered online is relatively cheap and prices for many goods are falling. 

If the inflation rate would be higher than prices for hospital services, colleges & housing would even rise faster because there are less efficiency gains caused by technological progress.