Back in March, the IMF raised the prospect that “lowflation” — not quite deflation, but pretty darn close — could mean Eurozone growth never gets back to healthy levels.
It’s not just Europe anymore.
This weekend, St. Louis Fed economist Silvio Contessi posted a chart showing how lowflation is now a feature of the developed world. It shows how far core and headline inflation has deviated from targets set by central banks, including ones that are supposed to be immune from the Eurozone’s histrionics, like Sweden, Switzerland and Denmark.
Why is this scenario worrisome? Even if advanced economies do not fall into plain deflation, prolonged lowflation below inflation targets may undermine the successful work of several central banks in anchoring inflation expectations to close to 2% in the past 20 years. In addition, lowflation has ‘real’ consequences because it increases the real burden of repaying outstanding public and private debt that have grown quite large in advanced economies after the financial crisis.
In other words, central bank easing may have never had a chance at doing much to boost growth because they were being executed in an economic environment that basically smothered their effect on impact.
What’s more, Contessi is saying, the lack of growth in wages and interest rates is going to make paying off everyone’s debts much more difficult.