A more fundamental factor is at work, too: People believe inflation will stay low. And inflation expectations can be self-fulfilling. Suppose a company expects to pay 3 percent more for salary and materials next year. It will then raise its own prices 3 percent. The company's expectations would help produce 3 percent inflation.
Ask people if they're enjoying low inflation, and you may encounter puzzlement. Many of us don't feel it. One reason: Apart from the government's broad inflation gauges, many items have gotten much costlier over the past five or 10 years.
Though gasoline prices, for example, have risen just 1 percent in two years—a big reason overall inflation is low—gas is still nearly 14 percent costlier than before the recession. Drivers face that reality every day.
Consider Allison Casey, 63, of Essex, Conn. She was relieved to find a job in August after 18 months of unemployment. But Casey now drives 25 miles each way to work at a specialty food store. She used to drive just a mile to her job as a chef at a country club.
Recently, she paid $3.56 a gallon. Six years ago, "I was probably paying $1.65 or $2 for a gallon of gas."
Other services have grown more expensive. Health care costs have long risen faster than overall inflation. And college tuition has soared 76 percent in 10 years. Yet stable or falling prices for many other items have offset those trends.
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Low inflation does help when pay increases are weak. Consumers can stretch their dollars, yen and euros. In hard-hit European economies, such as Greece and Portugal, prices have actually fallen in the past year.
Ace Hardware CEO John Venhuizen says his company paid less to manufacturers for products it sells in 2013 than in 2012. That's helped offset other rising costs, such as health care.
"We are delighted," Venhuizen says. "There's far less price pressure than I would have anticipated five years ago."
Yet low prices pose a downside for some businesses. Big chains such as Wal-Mart, Best Buy and Bed, Bath & Beyond fought a brutal price war during the past holiday shopping season. The discounts got Americans to spend more. But 33 retail chains cut their profit estimates for the final months of 2013, according to RetailMetrics.
By contrast, if retailers could raise prices, say, 3 percent or 4 percent, the extra revenue would allow them to pay employees more. And they wouldn't have to rely strictly on cost cuts to deliver profits.
Other businesses might also spend more. U.S. companies are sitting on nearly $2 trillion in cash, according to the Fed. Jared Bernstein, an economist at the Center on Budget and Policy Priorities, notes that low inflation leads many businesses to hoard cash. Higher inflation, by contrast, would erode the cash's value. So businesses would be more inclined to spend—to hire or buy equipment.
Higher inflation would also make it easier for Americans to manage their debts. Laurence Ball, an economics professor at Johns Hopkins, notes that many car buyers have loans with rates of 2 percent or less. If inflation were 3 percent or more, pay would likely rise. The car loans would become cheaper to pay off.
In Europe, higher inflation could help resolve that region's economic crisis. Greece and other poorer members of the eurozone let wages and prices rise too high, and their goods became comparatively expensive. Now, they must reduce wages and prices, especially compared with stronger economies like Germany. If inflation were higher in the richer countries, it would help ease prices and pay in the poorer countries and encourage hiring.
In the United States, many economists have long feared that the Fed's efforts to stimulate growth would ignite inflation. Since 2008, the Fed has bought more than $3 trillion in bonds to try to keep loan rates low to encourage spending.
Yet to the surprise of many, all the money the Fed has pumped out hasn't caused prices to jump.
"It's a bit of a riddle," says Richard Fisher, president of the Federal Reserve Bank of Dallas.
Other economists note that most of the money the Fed has created is being held by large commercial banks as reserves. And consumers and businesses aren't clamoring for loans. Banks have tightened their lending standards. So the new money created by the Fed hasn't circulated through the economy, where it might have accelerated inflation.
Most economists foresee inflation remaining low for at least two more years. Fed policymakers have forecast that inflation will be just 1.7 percent to 2 percent in 2016.
They'd be happy to be wrong. An uptick in inflation "is a sign that growth is happening," says Alberto Cavallo, an economics professor at MIT.
—By The Associated Press