It’s absurd to think interest rates are a tool powerful enough to counteract the complete restructuring of the global economy that has taken place since the millennium:
- Trade agreements that allow for moving manufacturing to places with vastly cheaper labor and far less regulation
- The internet allowing consumers to compare prices easily or simply shop online
- Vast overbuilding of retail floor space leading to intense marketplace pressure
- IT infrastructure that allows companies to shop for talent worldwide along with telecommuting
The two things that created the appearance of inflation over the past decade were the wealth effect, primarily due to rising house prices, and falling developed world currencies relative to hard assets, primarily commodities.
The European producer price index was down 0.9% year-over-year in data released today in another example that developed world inflation is nearly non-existent.
In theory these factors would have pushed prices lower long before now but mild inflation has been incredibly sticky due to things like union agreements, expectations of rising inflation and the incredible success of advertising.