How deflation/low inflation situations are different in US, Japan and Europe..

Mickey Levy, Chief Economist of Bank of America explains the topic in voxeu.

He says there are no real reasons for worry with respect to US. Though Europe has to prevent itself from becoming another Japan. For Japan, it has to continue to make efforts to come out if its nearly 25 year mess:

There is far too much angst about the possibility of deflation in the US. With nominal GDP accelerating, labour markets improving, and the cost of housing shelter (owners’ occupied rent) accelerating, the probability of deflation is near zero. It is highly probable – perhaps 80% to 90% – that core inflation has troughed, and will rise modestly in 2014–2015. Moreover, far too little attention has been paid to the fact that the vast majority of the US’s recent disinflation has resulted from technological innovations that raise economic performance and potential. This is very different from disinflation/deflation associated with insufficient aggregate demand, which may adversely affect spending behaviour and exacerbate economic underperformance.

In contrast, Europe suffers from sluggish economic growth and ongoing adjustments following a sustained period of excesses. The most likely outcome is that inflation will stay very low and likely recede toward zero, and there is some nontrivial probability – perhaps 20% – of temporary mild deflation. The proper balance of policies must weigh the need for economic reforms and long-run objectives with near-term concerns about deflation.

Japan faces a very different situation. Its two-decade-long struggle with on-and-off deflation and economic malaise illustrates the harmful effects of misguided policies that result in insufficient demand and constrain economic activity. The Abe administration is attempting to radically change expectations and boost performance. Success hinges on whether the Bank of Japan’s aggressive monetary stimulus boosts confidence sufficiently to generate sustained increases in spending, and whether the stimulus is accompanied by reforms that tackle economic inefficiencies and lift potential growth. Thus far, longer-run reforms are lacking. I expect that in 2014 core inflation will stay above 1%, but below the Abe administration’s 2% goal.

Nice bit…


One Response to “How deflation/low inflation situations are different in US, Japan and Europe..”

  1. Eidmon Tesfaye Says:

    Reblogged this on

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