Risk of Stagflation vs. Deflation

RGE Monitor

RGE Monitor

  • Roubini: U.S. and global economy are at risk of a severe stag-deflation. A severe global recession will lead to deflationary pressures. Falling demand will lead to lower inflation as companies cut prices to reduce excess inventory. Slack in labor markets from rising unemployment will control labor costs and wage growth. Further slack in commodity markets as prices fall will lead to sharply lower inflation. Thus inflation in advanced economies will fall towards the 1% level that leads to concerns about deflation
  • MS: Inflation will be lower in the near term but there is now high risk of high inflation in the long term. Why? 1) It is doubtful that policymakers will be able and willing to quickly and fully reverse easing when things stabilize. 2) The likely sharp rise in government debt in several countries should increase political pressures on central banks to keep interest rates low. 3) If potential GDP growth has slowed a lot, global recession will not create as much slack and disinflationary pressures as is widely believed
  • JPMorgan: It’s normal for inflation to lag behind growth for quarters after global economy moves from strength to weakness. Slowing growth means slowing inflation eventually. Currency depreciation may lead to higher imported inflation in emerging markets
  • Comparisons with 1970s Great Stagflation:

  • Like the 1970s, 1) inflation was driven higher by commodities with negative supply shocks (though this time coming from poor weather, trade barriers and environmental regulations rather than OPEC) and 2) growth is slowing globally led by U.S.
  • Unlike the 1970s, 1) no wage-price spiral, 2) no Nixonian price controls in the U.S. (but controls do exist elsewhere), 3) commodity price rises also due to positive demand shock, 4) credit crisis and asset deflation in developed world spreading globally, 5) falling inflation in developed world

One Response

  1. The fed is always behind in policy or too early. It is difficult to do thing in time mainly because of the fear of stopping the recovery or reversing it. However there is a slight possibility that the amount of credit destroyed worldwide might be near all the printed money causing a zero effect. It is always good to hope. But i do agree that inflation is possible. It is also easier to give but later there would be nothing to force people to buy bonds. So even if they are prepared to reverse the injection they might not be very good at it.

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