A conundrum has emerged for economists and market participants, writes The Wall Street Journal: Why does inflation remain weak even as major economies are growing at a faster clip?

This phenomenon challenges standard economics, which holds that when growth is strong, demand goes up, prompting companies to offer higher pay in order to attract more workers. In turn, companies raise their prices.

Central banks typically lower rates to boost demand when inflation is weak and raise them when inflation exceeds the banks’ targets. This often means that bonds perform well when stocks are reflecting economic weakness.

But for much of the past decade, bonds and stocks have been moving in the same direction. In 2017, the S&P 500 had gained nearly 10% while the price of 10-year Treasuries has risen 6%, pushing the yield to near 2%.

Economists are offering various explanations for the breakdown of the growth-inflation relationship.

European Central Bank President Mario Draghi said in June that official statistics aren’t accurately counting people in temporary jobs or outside the labor force. This means those numbers are exaggerating the strength of labor markets and of the broader economy.

More recently, Federal Reserve governor Lael Brainard has offered as an explanation “the experience of persistently low inflation.” In other words, inflation has been low and falling for years, so families and companies expect it to continue to remain low.

Some observers are saying, however, that a deeper shift may be underway. As possible explanations, they’re looking to globalization, the decline of unions and the emergence of large companies such as Amazon that keep prices low in order to boost market share.
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