The old model is broken
The WSJ today writes about the Fed's struggle to understand what's happening with inflation. The 20th century model was all domestic. When the labor market tightened, it drove more demand for goods and prices rose. It's the basic Phillips Curve.
However US inflation is now stuck under 2% despite record employment and a growing economy. The answer is obvious: the combination of globalization, automation and deunionization have made it possible to produce and/or import an basically unlimited amount of consumer goods without causing inflation.
Elsewhere, technology has expanded access to raw materials.
So the Phillips Curve now only basically works in a global sense. Prices respond to global inputs and less on domestic demand. That's not to say that domestic inputs aren't a factor -- especially on wages and housing -- but less so on consumer goods.
The WSJ brings it into closer view, noting a study showing that about half the goods in the PCE inflation measure don't respond to changes in demand.
Core PCE:
