The Storm Before the Calm

Price deflation is far more likely than inflation in the near term. But temporary deflation need not be the terror that central bankers fear, at least if the banking system is recapitalized and if interest rates in the industrial countries fall sharply.

OXFORD – Central banks can stop worrying about inflation. Price deflation is far more likely in the near term. But temporary deflation need not be the terror that central bankers fear, at least if the banking system is recapitalized and if interest rates in the industrial countries fall sharply.

As recently as September and October, the United States Federal Reserve and the European Central Bank both saw the risk of inflation as being roughly equal to the risk to growth. Both were reluctant to lower interest rates markedly. Indeed, financial markets may have taken the Fed’s view on US inflation as representative of other central banks’ outlook on inflation, reinforced by the surprising ECB decision of October 2 to keep interest rates on hold.

In October the US was on the cusp of the most significant turning point for inflation in the last 20 years. Of course, forecasting inflation is notoriously difficult. There have been large structural shifts in the world economy (e.g., trade and financial globalization) as well as in individual economies (such as the decline in trade union power). Monetary policy itself has shifted to a far greater focus on inflation.

To continue reading, please log in or enter your email address.

Registration is quick and easy and requires only your email address. If you already have an account with us, please log in. Or subscribe now for unlimited access.

required

Log in

http://prosyn.org/VpcLWoL;