Alex Brandon, Associated Press
While the historically low interest rates in the U.S. and many other developed economies have been the source of ongoing concerns about future inflation, an increasing threat of deflation is receiving global attention. Recent economic figures in the eurozone have spurred warnings from some financial policymakers.
Recently, Christine Lagarde, managing director of the International Monetary Fund, indicated her concern about the increasing threat of global deflation. She indicated a particular worry about the aggregate low inflation in the eurozone and persistently high unemployment in that area.
Through December 2013, the annual inflation rate among the 17 countries where the euro currency is used was calculated to be less than 1 percent. European Central Bank president Mario Draghi responded to these below-goal inflation results, indicating he was not currently concerned about deflation. Additional comments from the ECB show an expectation of prolonged low inflation but not an immediate risk of deflation.
Inflation in Germany, which has Europe’s largest economy, decreased to an annualized rate of approximately 1.2 percent in December from an annualized rate of 1.6 percent in November. Jens Weidmann, president of Deutsche Bundesbank, responded to these decreasing inflation results; in his view, deflation is only a limited risk.
The Bank of England has indicated a target inflation rate of 2 percent in the United Kingdom. Some of the more current inflation indicators in the U.K. show inflation approximately at the Bank of England’s target rate, a level to which it has not fallen for several years.
In the U.S., the Federal Open Market Committee’s stated goal of 2 percent inflation is not being met. Recent Consumer Price Index readings show increases of only 1.2 percent, as compared to a year ago. Although reported unemployment is trending down, the decreasing labor participation rate is likely masking a higher underlying core rate of U.S. unemployment.
Given these differing views on the risk of deflation in the eurozone and possibly more widespread, it is likely global monetary policy will remain accommodative in the foreseeable future.