Threat of Deflation

For the duration of the financial crisis and the long recovery that has followed, detractors of the Federal Reserve’s ongoing experimentalism have warned against stoking runaway inflation. It is a credible concern but not one that has proven out. While it stands to reason that low costs of capital have played their role in lifting asset prices, fears of broader inflation at the hands of central bankers have thus far been misplaced. As labor markets tighten in the United States, above-target inflation may rear its head; in the here and now, deflation is the more immediate threat.

In the United States and elsewhere, inflation is running below monetary policymakers’ assumed target of 2 percent. In the extreme, declining prices on the Continent have shaken the European Central Bank out of its relative disengagement and onto a belated course of quantitative easing. Across the leading European economies, only Norway and Austria can boast inflation above 1 percent. Back at home, where growth is stronger and labor markets are tightening, December’s consumer price index was just 0.7 percent higher than a year earlier.