Free exchange: The death of inflation

Posted: April 12, 2013 in economy
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Free exchange


Central banks in the rich world may have been too successful in subduing price pressures

IT TOOK an iron will (and a handbag) to beat the inflation of the 1970s. Under Margaret Thatcher the British government squeezed the economy with high interest rates until the beast submitted. The Federal Reserve, then led by Paul Volcker, followed suit. Such displays of fortitude convinced markets that governments were serious about keeping inflation low. Expectations of future price increases converged around central-bank targets, touching off an era of long expansions and mild recessions. Yet relative price stability may now be adding to the rich world’s economic woes.
Deep recessions like the recent global contraction would normally be expected to send inflation tumbling. Workless labourers ought to reduce wage demands to find employment; firms with unsold goods should slash prices to clear inventories. There was every reason to expect that inflation would go to zero or even enter …

via Economic Crisis


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