Sat, Apr 18, 2015 - Page 15 News List

Deflation fears recede as prices pick up

OUT OF THE WOODS?While some analysts lauded the results of monetary easing, others said developed nations were still in a prolonged period of sub-par expansion

Bloomberg

Central bankers and finance officials said the deflation shock that marked the start of the year is receding as monetary-easing policies show signs of pushing prices higher.

After a plunge in oil prices and a stumble in global economic growth raised the specter of falling prices, policymakers gathering in Washington on Thursday said inflation is now slowly, but surely starting to pick up.

“The risk of that prolonged deflationary episode is diminished,” IMF deputy managing director David Lipton said. The IMF is hosting its spring meetings.

The threat of slower price gains proved enough for about 30 central banks to ease monetary policy this year, led by the European Central Bank’s (ECB) embrace of quantitative easing, and for the US Federal Reserve to signal it is in no rush to raise interest rates.

Of 18 major central banks, 16 undershot their inflation targets in January, according to the Bank of England.

Now the deflation fears might be subsiding with Morgan Stanley economists this week saying global inflation is at a turning point as wages, demand and prices outside of energy firm. They raised their forecast for consumer price growth in advanced economies this year to 0.3 percent from zero and predicted acceleration to 1.7 percent next year.

Speaking on a panel organized by the IMF, US Federal Reserve Vice Chairman Stanley Fischer said the US central bank expects to reach its inflation target of 2 percent and noted signs that growth and wages are beginning to strengthen.

The Fed’s measure of inflation has been under target for 34 straight months.

“We expect to come back and move toward 2 percent over a couple of years,” he said.

Meantime, ECB Executive Board member Peter Praet said there is “no doubt” over the euro area’s commitment to delivering price stability even after eurozone prices fell for a fourth month last month. The ECB last month began a 1.1 trillion euro (US$1.18 trillion) bond-buying program.

“The indications are there to support the view that inflation will gradually return to our definition of price stability of below but close to 2 percent,” Praet said in his prepared remarks.

Bank of Japan (BOJ) Governor Haruhiko Kuroda told reporters elsewhere in Washington that “the trend of prices is firm” in his economy and that inflation will soon “accelerate rapidly” toward his 2 percent target.

The BOJ’s main gauge of the cost of living slowed to zero in February.

Not all analysts are upbeat.

Former US secretary of the Treasury Lawrence Summers reiterated his concern that many rich countries are suffering from a prolonged period of sub-par expansion that would strand real interest rates persistently near zero.

“Now more than ever, secular stagnation is an important feature of reality,” said Summers, who now teaches at Harvard University.

That argument was rebutted by his Harvard colleague Ken Rogoff, who said economies are sluggish because households, banks and companies are having to retrench after a “supercycle” of debt.

“The whole focus on secular stagnation is wrong,” Rogoff, a former IMF chief economist, said in an interview.

Even as rich nations rally, some emerging markets, such as China, might be at renewed risk of slowing inflation as they suffer eroding demand and the squeeze of a rising US dollar.

Reserve Bank of India Governor Raghuram Rajan warned of a “substantial slowdown” in such nations, some of which he said could even suffer from deflation.

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