Disinflation is already here. Can deflation be far behind?
The major economies of the world are increasingly facing the threat of slowing rates of inflation (the rate at which the prices of goods and services increase). Normally, that’s a good thing, but like anything taken to excess, there can be bad side effects.
The expectation of lower prices in future discourages consumer spending, prompting shoppers to postpone purchases in the hope of cheaper prices later. That, in turn, discourages companies from hiring and manufacturing, affecting economic output and growth.
Ultimately, they lead to deflation, a situation of falling prices, which is typically very bad for economies. For proof, look at Japan, which has languished in a deflationary spiral for more than two decades.
No wonder everyone’s biting their nails at the thought of this economic phenomenon taking hold in developed nations. Indeed, deflation currently ranks as the biggest threat to the global economy’s — in particular, the developed world’s — fragile recovery.
Already, the list of countries in the ‘danger zone’ of inflation below 2% and falling is increasing. Latest data shows that inflation (harmonised cosumer price index) in the 18-country eurozone slumped to 0.5%, the slowest pace in more than four years.
In the broader 34-country group that makes up the Organisation for Economic Cooperation and Development (OECD) too, inflation fell to 1.4% in February from a year ago, lower than the 1.7% seen in January.
Meanwhile, in the UK, which is not part of the eurozone, inflation was lower at 1.7% in February, a four-year low, after slipping to 1.9% in January. The Bank of England targets a 2% rate for inflation.
Across the Atlantic, inflation in the US is also at a lowly 1.1%, also sinking much lower than the 2% target of the Federal Reserve.
Such disinflationary pressures could turn into outright deflation if government/monetary action is not taken.
To be sure, deflation is not a good state for the global economy to be in.
Things are starting to get just a bit hairy.