After years of low inflation, investors and policymakers have settled into a cyclical mindset that assumes advanced economies are simply suffering from insufficient aggregate demand. But they are ignoring structural factors at their peril.
Debates about inflation in advanced economies have changed remarkably over the past decades. Setting aside (mis)measurement issues, concerns about devastatingly high inflation and the excessive power of bond markets are long gone, and the worry now is that excessively low inflation may hamper growth. Moreover, while persistently subdued, negative – interest rates may be causing resource misallocations and undercutting long-term financial security for households, elevated asset prices have heightened the risk of future financial instability. Also, investors have become highly dependent on central banks, when they should be prudently more fearful of them.
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