​​4 theories on why the inflation is lower today than 10 years ago

After almost 30 years with falling interest rates, many are now asking themselves whether inflation has died for good. The low inflation is considered to be a result of cheap commodities, labor market slack and low productivity growth. The two last-mentioned reasons are the cause for the weak wage growth, which in turn also is a reason for the low inflation.

The fact that we have low productivity growth can be hard to accept, since we almost daily can observe improvements brought by the digitalization that improves our everyday life. We don’t know why the productivity growth is so low, but there are a few theories on the subject:

1. Productivity growth is in fact low – growth in our output vs. our input has slowed down, so there is no reason why real wages should grow and inflation stays low;
2. We measure things wrong – productivity has increased, but in the form of time saved rather than in money, which means it’s hard to measure. The sharing economy brings with it a more efficient use of resources, so the output is smaller but the efficiency is higher. In addition, there are several important activities that aren’t captured by conventional economic measures, such as free access to information on Google;
3. The productivity could have grown, but we’re not using our time savings for working more – instead we are using it to surf around on social media;
4. There is an investment lag – we have invested a lot which will in turn result in productivity growth, but we have not seen the effects of it yet. For instance, one can now do banking errands online, but it is when a full transition to online has been completed that the full productivity growth will be gained

My conclusion: the reason for why we see a low productivity growth is likely a mixture of the above theories. Higher commodity prices and reduction in labor market slack will likely produce a higher inflation in the near term, but the structural downward pressure on inflation is likely to continue.

This article was previously published in Swedish, you find it here:

4 teorier om varför inflationen är svagare idag än för tio år sedan: https://goo.gl/EZd1A1

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