Low Inflation is a phenomenon when the prices of goods and services do not increase rapidly. This situation is not much harmful for any economy because it could be controlled by the adoption of certain measures unlike high inflation which is almost uncontrollable. Many economists have seconded this view since no economy at the present times is free from inflation therefore it would be a matter of achievement if they could maintain the level of inflation at a lower rate.
Reasons for Low Inflation
Dr. Blinder has provided certain reasons that lead to low inflation. According to him the inflation is caused due to certain non effective monetary policies and excess demand of goods created by global boom. It is also caused due to the unexpected supply shocks and the faulty price control measures.
The Measures to Reduce Low Inflation
Dr. Blinder has also observed regarding the measures that could be taken up to reduce the inflation level. They are:
- The Central Bank should renovate faulty monetary policies
- The supply shock should not be repeated and the price control measures should also be renovated
- Sometimes an economic slack is required to release the pressures from the economy.
- The independence of the Central Banks also contribute a great deal towards low inflation
- The inflationary condition in an economy should be such developed that it exhibits inertia then the rise of the prices is lowered
- The spare capacity of various industrial and semi-industrial has increased leading to low inflationary rates
Most importantly as Dr. Blinder observes that the FED should declare a public inflation rate which would not only make the process transparent but also would help the economies of various countries to fix their targets.
In the event of low inflation rates the real earnings would grow which in turn would lead to higher P/E. During low inflation the quantity of earnings is high therefore the investments in a company also increase. Hence, the relation between the P/E and low inflation is inversely proportional.