Who Killed Inflation?

The lack of price pressures has turned central banks into political punching bags

- Cristina Lindblad

If economics were literature, the story of what happened to inflation would be a gripping whodunit. Did inflation perish of natural causes—a weak economy, for instance? Was it killed by central banks, with high interest rates the murder weapon? Or is it not dead at all but just lurking, soon to return with a vengeance?

Like any good murder mystery, this one has a twist. What if the apparent defeat of inflation blew back on the central bankers themselves by making them appear expendable? Far from being lauded for a job well done, they’re under populist attack. “If the Fed had done its job properly, which it has not, the Stock Market would have been up 5000 to 10,000 additional points, and GDP would have been well over 4% instead of 3% … with almost no inflation,” President Donald Trump tweeted on April 14. On April 5, channeling Freddie Mercury of Queen, he said “you would see a rocket ship” if the central bank eased up.

The irony of Trump’s criticism of the Federal Reserve is that by historical standards, the bank is remarkably dovish—that is, inclined to keep rates low. After decades of working to tamp down inflation, even at the cost of inducing recessions, and finally succeeding, central bankers in developed economies have spent most of the past 10 years reversing course and trying to reignite it, with very little success. At a press conference on March 20, Fed Chairman Jerome Powell said low inflation is “one of the major challenges of our time.”