In the recent “Explaining Low Inflation: Model-Based Decomposition”, Saeed Zaman goes through a lot of trouble to find that:
While simple, the forecasting model used in this analysis was able to explain most of the falloff in core PCE inflation over the past four years as a response to other developments in the economy.
According to the model, the sluggish pace of labor market recovery in 2012 and 2013 had been restraining core inflation along with lower energy prices. But over the past year or so, the sharp falloff in energy prices and the rapid appreciation of the nominal dollar have acted to significantly restrain core inflation, while the labor market has been putting some upward pressure on inflation.
Historical experience suggests that the impact of both temporary energy and dollar shocks on core inflation is usually short-lived. Therefore, to the extent we are confident that economic activity will continue to increase moderately and slack in labor markets will continue to diminish, these factors should put upward pressure on inflation during the next few years, as we forecast inflation to rise at a very gradual pace.
OK, OK. I find “able to explain most of the falloff in core PCE inflation over the past four years as a response to other developments in the economy” a time-honored argument. After all, back in the high rising inflation of the 1970s, Arthur Burns could say with a straight face that the rise in inflation (core PCE, whatever) was also a response to other developments in the economy. In that instance to the power of trade unions, oligopolies and oil producers!
Mr Zaman just doesn´t see monetary policy having much to say in the matter. The chart could be interpreted as calling-out his conclusion!
Note that inflation even stops falling when nominal spending growth backs-up just a bit, only to resume the down trend when NGDP growth once again falters.
Couldn´t Mr Zaman, along with a host of other analysts and researchers, as well as with the top brass at the Fed, look at the problem from another perspective and conjecture that just maybe, “other developments in the economy” (the exchange rate, oil prices, labor market weakness) and low inflation, could all be responding to inadequate and tight monetary policy?