What’s Next, Noflation?

After Christine Lagarde bandied the Deflation ogre about, more moderate voices insisted we talk about the Disinflation, umm spectre instead. Spectres just scare the pants of of us rather than rending us limb from limb. That’s so much better.

At Bloomberg last week, Peter Kennedy reported on a new ‘flation-word. Inflation. Deflation. Disinflation. The Threat to Europe? Lowflation:

For all the fears of a Japan-style era of deflation, a more likely threat for Europe is what International Monetary Fund officials are calling lowflation.

A sustained period of ultra-low, albeit rising, inflation still has the potential to destroy output, hurt hiring and revive memories of the recent fiscal crisis by hammering the ability of governments to repay debts. With data yesterday showing inflation about a quarter of the European Central Bank’s goal of just below 2 percent, President Mario Draghi is under pressure to respond.

“It is imperative to return inflation to the target as quickly as possible,” said David Mackie, chief Western European economist at JPMorgan Chase & Co. in London. “The ECB needs to acknowledge having low inflation for a long time isn’t neutral.”

But, Lowflation might be more ogre-ish after all. In Getting the message, The Economist picked up on lowflation, and took it seriously:

With inflation dropping further in the euro zone to just 0.5% in March, Ms Lagarde had highlighted the emerging risk of “lowflation”. Mr Draghi said that the council was unanimously committed to using unconventional as well as conventional measures to “cope effectively with risks of a too prolonged period of low inflation”. With little conventional ammunition left, since the ECB’s main lending rate is already just 0.25%, he spelt out that the unconventional measures might include quantitative easing – buying assets with central-bank money – as well as charging negative interest rates on overnight deposits left at the ECB by banks. …

In fact, that is not the only worry about lowflation. Another is that when inflation is so weak, it would take only one further unfavourable shock to demand to tip the currency club into outright deflation, which would harm growth by creating an incentive to postpone purchases and by exacerbating already onerous debt burdens in real terms.

Peter Schiff, a financial analyst of the Austrian leaning, seems comfortable with disinflation and/or lowflation, which leaves little opportunity to make money other than financial speculation – his bailiwick. Schiff is bearish on the US main street economy, preferring foreign investments, and while he (and Roubini) garnered some respect for predicting the collapse before the Great Recession, he has often (so far incorrectly) predicted that hyperinflation is lurking in the wings. In Russia Today, he pooh-poohs Lagarde’s fears in Meet ‘lowflation’: Deflation’s scary pal:

In recent years a good part of the monetary debate has become a simple war of words, with much of the conflict focused on the definition for the word “inflation.”

Whereas economists up until the 1960’s or 1970’s mostly defined inflation as an expansion of the money supply, the vast majority now see it as simply rising prices. Since then the “experts” have gone further and devised variations on the word “inflation” (such as “deflation,” “disinflation,” and “stagflation”). And while past central banking policy usually focused on “inflation fighting,” now bankers talk about “inflation ceilings” and more recently “inflation targets”. The latest front in this campaign came this week when Bloomberg News unveiled a brand new word: “lowflation” which it defines as a situation where prices are rising, but not fast enough to offer the economic benefits that are apparently delivered by higher inflation. Although the article was printed on April Fool’s Day, sadly I do not believe it was meant as a joke.

Update 20140409: Many otherwise progressive peakists and collapsniks find themselves as strange bedfellows with anti-inflation economists like Schiff and at odds with inflation-creates-growth Keynesians like Paul Krugman. Peakists feel that growth and inflation rely on increasing supplies of limited energy resources, thus that trying to grow is doomered to failure. Unfortunately, limping along in low- or disinflation is also increasing the misery index as financial barons profit while everything else declines.

I wonder if there is a third choice.


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