Is low inflation sometimes a sign of economic problems?
Yes
Low inflation can sometimes be a sign of economic problems because it may be associated with weakness in the economy. When unemployment is high or consumer confidence low, people and businesses may be less willing to make investments and spend on consumption, and this lower demand keeps them from bidding up prices. Low inflation can also be a problem because it prevents the Federal Reserve from offsetting economic weakness by lowering interest rates, since interest rates tend to decrease in tandem with inflation. If inflation and interest rates are too low, the Fed may be unable to further reduce interest rates in order to boost economic activity because negative interest rates are difficult to implement and sustain. Core inflation was below the Fed’s target of 2% since it set that goal in 2012 through the end of 2020.
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Sources:
EconoFact Why Did the Fed Change Its Framework? And Why Does It Matter?
Fred (Federal Reserve Bank of St. Louis) Personal Consumption Expenditures Excluding Food and Energy (Chain-Type Price Index)
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