President Donald Trump has been an instrument of chaos—goading nuclear powers, blasting the FBI, and mocking his enemies—the global economy scarcely seems to have noticed. In Europe, manufacturing confidence hit a 10-year high, according to JP Morgan. In Japan, business confidence has hit a 30-year high. The U.S. labor market has added jobs for 75 consecutive months—a record. In the likely event that the economy is still expanding in May, this will be the second-longest period of economic growth since the end of World War II. (GDP would have to keep growing for another 18 months to catch the all-time record, the 1991–2001 expansion.) On Wednesday, the Dow Jones Industrial Average surpassed 25,000 for the first time ever, after another round of strong jobs data.
It’s impossible to say for certain how long any of this will continue in 2018. The 2017 economy benefited from several trends, like the nice bump in oil and metal prices, that could be temporary boons. But if 2018 is indeed a redux of 2017, we may finally glimpse an emerald-rare phenomenon in the post-1970s economy: inflation higher than 2 percent.
There are two important questions regarding inflation: Can higher inflation, which can sometimes spin out of control, be good; and why aren’t we getting more of it?
The first question is easier to answer. Inflation in the economy is like yeast in bread; both too much and too little ruins the loaf, but a little bit makes the dough rise. The right amount of inflation—say, between 2 and 3 percent—can push up wages and stimulate economic expansion. Since the Great Recession ended, the most common measure of inflation, the “core” consumer price index (which discounts volatile food and energy costs), has been under the Federal Reserve’s target of 2 percent. That’s one reason why so much of the economic recovery has felt so feeble.
The second question—why is higher inflation so elusive—is one of the larger mysteries of the last few years. Since March 2009, the world’s central banks have pumped more than $11 trillion in stimulus into the global economy. Stock prices have tripled. But U.S. inflation hasn’t surpassed the Federal Reserve’s target of 2 percent for more than a few months total. Price and wage growth are dormant across developed economies like the U.S., Europe, and Japan.
There are several possible reasons. First, lower inflation is a natural feature of a moribund recovery following a financial crisis, like the Great Recession, when families spend less after they lose jobs and their housing values plummet. Second, aging populations in advanced economies might be restraining economic growth, since pensioners, by definition, don’t work much. Third, internet companies and communications technology might be keeping prices low; for example, Uber has made urban transit cheaper, and Amazon and Walmart have held down retail prices. Finally, it’s possible that larger companies—not necessarily monopolies, but monopoly-ish—have fewer competitors, so they can afford to restrain wage growth. (The average market cap of a public U.S. company is 10 times higher than it was four decades ago, according to JP Morgan.)