May 27, 2013

TRY TO COUNT THE PRESSURES:

Global inflation slide stirs the bogeyman (Rediff, May 27, 2013)
 
It wasn't supposed to happen this way. When central banks around the world started their quantitative easing programs, monetary theory said that the newly created funds could be dangerously inflationary. Instead, inflation rates are declining. In the United States, the current 1.1 per cent is far below the Federal Reserve's 2 per cent target. Policymakers now have to start worrying about their ultimate bogeyman - deflation.

If this fearsome enemy joins the field, the battle is hard to win. As the Japanese authorities have discovered, conventional weapons don't stop prices from falling, and the force of extraordinary ones remains uncertain.

Ben Bernanke and his Fed colleagues think the monster will stay on the leash. They chalk up the slowing pace of inflation to temporary factors, most notably falling energy prices, and they study expectations for future inflation which have not moved far from 2 percent.

That may be optimistic. In the United States and the euro zone, inflation rates have been heading downhill for more than a year. Japan, meanwhile, has been stuck with outright price declines since 2012. In theory, faster GDP growth could cause prices to reverse course, but the growth is elusive and the theory uncertain.

Moreover, the Fed's faith in inflation expectations may be excessive. Opinions can change quickly - they did in 2010 - and if commodity prices fall further, consumers might just start to expect overall declines - and then accept flat or falling wages.

Here are just three of the main downward pressures on prices: demographic, technological, and trade-driven. 

Posted by at May 27, 2013 6:23 PM
  

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