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Nov 11, 2016 | 12:48 GMT

3 mins read

Inflation Makes a Comeback in the Global Economy

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Inflation Makes a Comeback in the Global Economy

Inflation is back, or so the markets say. Though it never really disappeared in the first place, particularly in emerging economies, over the past several years inflation has ceded center stage to deflation, the global economy's current bugbear. After the 2008 crisis, governments sprang to action, printing and spending more money to stave off a repeat of the low-growth deflationary depression that swept the global economy in the wake of the 1929 Wall Street crash. For a few years, this strategy worked, but it began to falter in 2012. Shortly after they began, the flows of government spending dried up, leaving only money-printing to fight off deflation, and inflation dropped well below target in the euro area and the United Kingdom. Weakening inflation spread to the United States in 2014 as the price of oil began to tank. Meanwhile, Japan — having never recovered from its own 1991 depression — remained mired in low inflation as it had for the past quarter-century, offering policymakers a cautionary example about the dangers of a deflationary slump. Now, after spending much of the past few years jiggering with the global economy to try to generate inflation, the world's central banks may have to adjust their policies to accommodate new conditions. 

Inflation has not always been so hotly desired among the world's developed markets; in fact, for much of the global economy's history, it has been a fearsome prospect. At the most basic level, a deeply indebted global economy stands to gain from higher inflation, since debt repayments fall as the value of money does. (This explains how Europe's economies escaped the debt they accrued during World War II.) But with that benefit comes the inevitable risk that inflation could get out of hand, requiring high interest rates to curb it, driving up unemployment and hindering growth.

Based on the global economy's recent trajectory, high inflation with low growth, or "stagflation," is a very real danger. The global recovery has been anemic, and it looks poised to stay that way for some time thanks to low investment, weak innovation and inauspicious demographic trends. Should central banks stop their quantitative easing programs, the resulting surge in bond yields could inhibit increased government borrowing and spending — currently the favored proposed solution to stimulate demand and escape the low-growth trap. If inflation is indeed making a comeback after all these years, the world will have to come up with a new way to generate growth while acclimating once again to an inflationary environment. 

Inflation Makes a Comeback in the Global Economy
3 Geo |  1 Topics 

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