The forces of disinflation are permanent, not transitory, in my opinion.

The end of the Cold War marked the beginning of intense global competition. The U.S. economy has adapted to the competitive challenges better than the continental European and Japanese economies, and the dollar reflects this situation. In both Europe and Japan, market structures remain too rigid, with too much government intervention in the form of excessive regulation, protection and subsidies. Consequently, the uncompetitive economies of Europe and Japan are weak.The Europeans and Japanese are deregulating and restructuring their economies, but too slowly. Interest rates remain very low over there, especially compared with rates available in the United States. So, the dollar is strong, and will likely remain strong. Indeed, the weak Deutsche mark and yen are the only reasons that there is any growth in Europe and Japan at all. These countries need weak currencies to keep out of recessions. The Japanese financial system is still a mess. Huge loan losses have yet to be fully realized. A strong dollar should continue to be an important source of disinflation.

Why aren't wages rising at a faster pace with the unemployment rate so low? The favorite explanation is that the Federal Reserve's models didn't include variables for job insecurity, but that the models should soon be back on track once job insecurity goes away. I disagree.

Job security may improve, but we all face much greater business insecurity because markets are becoming more competitive globally as a result of the end of the Cold War trade barriers, and domestically as a result of ongoing restructuring, deregulation and privatization. We can all look forward to keeping our jobs as long as our companies don't fail.

The Fed's inflation models also seem to be missing variables to capture how price security is keeping a lid on wages. Workers and consumers are becoming increasingly secure about price stability. They perceive that prices are not rising fast enough to threaten their financial well-being, so they aren't very militant about wages.

My bottom line is that the forces of disinflation remain very much intact. They are not temporary; they are permanent. Tight labor markets are not inflationary because global competition is keeping a lid on prices and lowering workers' inflationary expectations.