Deflation 'ogre' probably won't come to life
By Andy Bruce
LONDON (Reuters) - Talk that some of the world's major developed countries are flirting with deflation, a damaging and sustained spiral of falling prices, probably won't turn to reality, according to the consensus of market economists.
Described last week by the head of the International Monetary Fund as the "ogre that must be fought", deflation is so feared because it sparks a vicious cycle of behavior that is difficult to reverse - as the last 20 years in Japan has shown.
If consumers and businesses start to expect prices of goods and services to fall in future they will postpone spending, depressing the economy and causing prices to fall further.
But that is not on the cards, according to hundreds of economists polled last week.
While inflation will remain weak through this year for most developed countries, none of the more than 150 economists polled by Reuters forecast even a quarter of consumer price declines in any of the Group of Seven countries.
"We think the threat of deflation is somewhat overdone. The obvious comparison is with Japan in the 1990s and 2000s, where there was genuinely a deflationary situation," said Philip Shaw, chief economist at Investec.
"But the Japanese experience suggests that deflation is much more of a risk when credit institutions have broken down. And that isn't the case for the majority of developed economies."
Although credit flows in the euro zone are weak and some banks might need recapitalizing, Shaw argues their situation is still healthier than that of Japan 15 years ago. Continued...