How low can it go? Inflation rates, already running at historically low levels around much of the world, have taken a fresh downward turn thanks to weak growth and the sharp drop in global oil prices. Can deflation be far off?
For many, it’s already here. Twelve of 55 high-income countries tracked by the World Bank were experiencing deflation in November, and another 28 had inflation rates of less than 1 percent. The median rate for the world’s 121 developing countries, which have typically had higher inflation because of low productivity and looser policies, stood at 3.6 percent. Expectations for inflation in five years’ time, as measured by forward swap rates, have fallen dramatically in recent months, especially in the euro area, prompting Mario Draghi and the European Central Bank to launch a major bond-buying program last month, but U.S. and Japanese experience suggests that quantitative easing is no cure-all for deflation. With ten-year bond yields trading at just 0.22 percent in Japan, 0.34 percent in Germany and 1.81 percent in the U.S., the mantra among investors at the World Economic Forum last month was “lower for longer.”
