Why Worry About Low Inflation?

As a kid growing up in the 70s, I knew just enough to realize that inflation was not a good thing. Back then, it was triggered in large part by rising oil prices and questionable monetary policy. The results were devastating. By the end of the decade, inflation had reached as high as 12 percent.

Circumstances are much different today. Inflation now sits below two percent, a persistent byproduct of the easy money years following the Great Recession.

An environment of low inflation often sounds appealing to consumers. After all, who wants prices rising out of control? And low interest rates make for much friendlier payment terms when you’re borrowing for a house or a new car.

But for banks, the picture is different. They need interest rates to be high enough to make lending worth their while. Of course, no one wants exorbitant rates, but a healthy and profitable banking system is critical to supporting a growing economy.

Low inflation also impacts monetary policy. When rates are as low as they are now, the Federal Reserve is left with fewer tools to help stimulate the economy if it becomes necessary.

And that could happen, since many economists speculate that low inflation foretells an economic slowdown.

The worst outcome would be deflation, in which the prices of assets and consumer goods continue to fall, often leading to a recession—which means declining wages, job losses, and other economic disruptions.

While we don’t have to worry about deflation just yet, it’s important to realize that low inflation is not a panacea. To gain a better understanding of how it can impact our economy, check out this Fortune article, Jerome Powell Is Right—We Should Be Worried About Low Inflation.