Global economic policy: The deflation dilemma | The Economist

More on the deflation watch. Here's a note from yesterday's Economist magazine.

Excerpt:

Deflation is also harder to fight than inflation. Over the past two decades central bankers have gained plenty of experience in how to conquer excessive price increases. Japan’s ongoing inability to prevent prices falling suggests the opposite task is rather less well understood. Although it is true that heavily indebted governments might be tempted to erode their debts through higher inflation, there are few signs that political support for low inflation is waning (see article).

Add all this together and the world’s big three central banks—in America, the euro zone and Japan—should worry most about falling prices. The scale of budget belt-tightening suggests these banks’ policy rates could stay way down for several years. But this will cause problems elsewhere. Near-zero interest rates in the big, rich economies send capital flooding elsewhere in search of higher yields, making it harder for the healthier countries to keep their economies stable.

While it is only one monthly report, this morning's relatively poor employment number illustrates that we are far from the point where companies are hiring aggressively. Large numbers of unemployed can only add to the downward pressure on wages, and therefore prices.



Global economic policy: The deflation dilemma | The Economist