After the 2001 recession following the tech boom, the 12-month rate of change in CPI (Consumer Price Index) began trending up, peaking in July 2008, during the middle of the Great Recession. Once the Great Recession ended, the upward trend in inflation did not continue. In fact, it began trending down. Average price data for Utilities also followed a similar trend.
Inflation hasn't come back into the picture since the Great Recession, which begs the question, where did it go? U.S. GDP declined by 4.3% from 2007 to 2009. This left many companies in a fight for survival, resulting in massive layoffs. Unemployment shot up from 5% to 10% in October 2009. Companies had to find ways to remain productive, even with a reduced workforce.
A wave of technological innovation began sweeping across America during this same time. Computer prices declined. Smartphones were finding their way into the hands of millions of Americans. The cloud was starting to take shape. Companies were beginning to find that these innovations allowed them to automate one of if not their biggest expense - employees. With a reduction in labor and manufacturing cost, products could be sold for less.
As smartphones connected to the cloud and high speed, always-on Internet became ubiquitous, prices across many industries remained low. Companies began hiring again, but wages stagnated due to hiring in low paying sectors. With few economic factors contributing to inflation's growth, it began trending down.
The Federal Reserve's target inflation benchmark is 2.25% to 2.50%, which it has not been able to meet. As recent as May 1, 2019, the FED stated, "On a 12-month basis, overall inflation and inflation for items other than food and energy have declined and are running below 2 percent," as reported by CNBC.
The recent 25% increase in tariffs may finally end low inflation, as many companies pass on price hikes to the consumer. Whether the consumer will react to such prices increases is yet to be seen.
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