At the September FOMC press conference, Yellen admitted that subdued inflation was a puzzle for the Fed. She said:

“This year, the shortfall of inflation from 2 percent, when none of those factors is operative is more of a mystery, and I will not say that the committee clearly understands what the causes are of that.”

Actually, the chart below shows that inflation has been subdued for years. The last time when the CPI was above the Fed’s 2-percent target (formally set in January 2012) in a decisive and lasting way was in 2011 and at the beginning of 2012.

Chart 1: CPI (yellow line) and core CPI (red line) as a percent change from year ago over the last 10 years.

The same applies to the PCE price index, which is the Fed’s preferred gauge of inflation), as one can see in the chart below.

Chart 2: PCE Price Index (yellow line) and core PCE Price Index (red line) as a percent change from a year ago over the last 10 years.

Let’s try to solve the ‘mystery’ of low inflation in recent years. According to Yellen, there are several possible explanations. In her September press conference and speech in Cleveland, she pointed out the following factors:

However, we can easily exclude some of them. Surely, the drop in oil prices and the appreciation of greenback contributed to the subdued inflation. But the biggest declines in oil prices and the strongest gains in the greenback occurred only from the mid-2014 to the beginning of 2016, as the chart below shows. Hence, these factors cannot explain the subdued inflation in other periods.