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Why Hasn't Inflation Been a Concern Until Now?

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Why Hasn't Inflation Been a Concern Until Now?

China keeps prices low by pegging the yuan to the dollar.

Credit: Chung Sung Jun Getty Images)

Question: Why Hasn't Inflation Been a Concern Until Now?

Answer: Until now, inflation has not occurred for three reasons. First, China exports have kept prices low. It has a lower standard of living, so can pay its workers less. China also keeps its exchange rate pegged to the dollar, which makes its products cheaper.

Second, technology such as computers keep workers' productivity high. Most information can be gotten in seconds from the Internet, so workers don't have to spend time tracking it down. Email is quicker than snail mail, reducing time and boosting productivity. Third, the surfeit of aging Baby Boomers allows corporations to keep wages low. These lower costs mean companies haven't needed to raise prices. /p

Inflation did occur in housing in 2005 and 2006. However, housing is not measured in the CPI, so economists said inflation wasn't a problem. Instead, the CPI uses rent prices as the equivalent of housing costs. But in 2005 and 2006, everyone was buying houses, not renting, so the CPI didn't record true housing price inflation. The result? The housing bust, subprime mortgage crisis and recession. Many economists said the Federal Reserve should have raised interest rates even higher to counteract the inflation in housing.

Inflation is occurring in health care costs and energy prices. This doesn't counteract the massive deflation in housing values and stock portfolios that occurred in the recession. Unemployment continues to rise, which leads to wage deflation.Right now, deflation is affecting people more than inflation.

Some economists are predicting inflation in the next few years. This is a result of the Federal government pumping trillions of dollars into the economy to prevent an even worse recession. These economists are concerned that this excess liquidity will lead to spiraling inflation in the near future. (Updated December 20, 2009)

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