The Economic Impact of Falling Oil Prices: "Expansionary Disinflation"

Expansionary disinflation- according to the author (John Hartley)- is the trend of economic expansion and falling inflation.

“Forget about the “secular stagnation” theory of an ailing U.S. economy. Accordingly to the Labor Department, payrolls grew at a seasonally adjusted increase of 242,000 in December adding to the soaring U.S. job growth of 2014 which represents the strongest annual job creation since 1999. The unemployment rate also fell to 5.6% in December, down from 7% a year earlier and far below predictions made by economists at the beginning of 2014. In addition, the past 2 quarters of GDP growth have been well above an annualized 4%. What complicates this rosy picture however for the Federal Reserve and its dual mandate is that core CPI inflation has fallen to 1.3%, well below the Fed’s 2% target and will likely continue to fall given the recent significant decline in the price of crude oil, an input to several products included in core inflation. The trend of economic expansion and falling inflation (“expansionary disinflation”) may exacerbate if oil prices continue to fall bolstering what economists would call a “positive supply shock”.

This is an article which focuses on a potential dilemma for the US economy in the wake of crashing prices.

According to John Hartley, “While most declines in inflation coincide with economic stagnation, the U.S. is experiencing a rare event: falling inflation (disinflation) and economic expansion. The current low inflation expansion (“expansionary disinflation”) economy is the complete opposite of the 1970’s stagflation that was characterized by

a surge in consumer prices, soaring oil prices and stagnating economic activity. This causes a serious problem for economists who are accustomed to the idea that inflation and employment move together, a concept crystallized in the Phillips Curve”.

He goes on to contrast the current situation with that of the 1970’s stagflation and highlights the difficulties the US Fed faces in reinforcing the recent economic resurgence or balancing economic expectations against international trends. With the oil price crashing and bringing the consumer spending index down, to what extent is this necessarily a good thing and when does it become a real economic concern; bottom line?.... It depends.

Source:

Forbes Article by- John Hartley: http://www.forbes.com/sites/jonhartley/2015/01/12/the-economic-impact-of-declining-oil-prices-expansionary-disinflation/