Global markets are still coming to terms with the fact that inflation is dead. For investors, the environment of entrenched low inflation means that average annual returns above 5 per cent will look terrific. While inflation stays low – or as seems likely, falls further – annual investment returns under 5 per cent will be more likely than not.

It has been more than two decades since the world had a genuine inflation problem. Inflation is low throughout the industrialised world and the current central bank fear is that deflation (a period of falling prices) is almost as big a risk as inflation over the next couple of years.

This is one reason why we are currently witnessing the most stimulatory monetary policy the world has ever seen. Interest rates in the G7 and in some other industrialised countries have been set at or near zero, there are trillions of dollars, pounds, euros and yen being printed and pumped into the banking system and there is no end in sight to this super stimulus. Indeed, many central banks in the industrialised world are extending the monetary stimulus with open-ended quantitative easing.

In the US, annual core inflation has been at or below 2 per cent for almost five years and there have been only two months in the last 15 years that it has been above 2.5 per cent. The most recent data show core inflation in the US decelerating towards 1.5 per cent after a short-lived 'jump' to 2 per cent early in 2012.

In the eurozone, core inflation has on average been even lower than in the US. It has been a decade since the annual rise in eurozone core inflation has been above 2 per cent and, for the last three years, it is averaging 1.5 per cent – which is where the most recent reading for core inflation sits.

In Japan, deflation is entrenched. This experience is yet to be repeated elsewhere and owes something to Japan’s demographic problem of low population growth and aging. That said, the recessed economy and policy failure in Japan means that the annual change in core inflation has been negative for all but six months in the last decade and in the last four years, the average annual rate of deflation has been around 1 per cent.

Inflation is also very low in Canada and the UK, even though the Bank of England faced a mini-inflation issue a year or two ago which was associated with the collapse of the pound.

This extended period of low inflation in the industrialised world has been driven by a range of influences, some deliberate, some accidental.

In the period up to about 2007, central banks targeted inflation with their monetary policy settings. It seems a while ago now, but that was when central banks hiked interest rates when there were signs of strong economic growth, capacity utilisation pressures and when the labour market was tightening. It cut them as these events reversed. On balance, the world’s central banks did well in meeting their targets in the period up to then.

This was helped, it must be noted, by the emergence of Asia in general and China in particular as low cost producers of manufactured goods. China was "exporting deflation to the world”, or so the saying went, and with it production of cheap clothes, electronic goods and other consumer items.

In the last five years or so, the story has been different. Central banks have been combatting recession and at various times, deflation. Monetary policy in the G7 countries has been set to super easy as central banks work to inflate their economies as the wreckage of the worst economic situation since the 1930s Great Depression crunches activity, spending, borrowing, jobs and prices.

With the exception of Japan, deflation has been averted. But there remain lingering doubts that any unexpected economic weakness in the next year or two from such a weak starting point in the eurozone, the US, UK or Canada would spark deflation fears. This is why the Fed, the ECB, Bank of Japan and Bank of England are all doing whatever they can to keep their respective economies growing.

There is one other critical issue that emerges from the current inflation climate. Low inflation makes it makes it harder for governments to repair their budget problems. They are not receiving gains in revenue from higher tax receipts, as wages growth is also being held back. Nor are companies growing profits, on average, much above the growth in nominal GDP. Consumption taxes also grow slowly due to the selling prices of goods and services being flat or rising at a very moderate pace.

A little bit of extra inflation would help the sovereign debt problems around the world. It might also spark a lift in consumer and business confidence. Unfortunately, for the near term at least, it looks like inflation will be staying too low despite the best efforts of the G7 central banks to kick it higher.

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Why is deflation so feared by the central bankers (Deflation: No ordinary accident, November 20)? If price rises were based on unsustainable assumptions and excess credit, isn't deflation the necessary and reasonable resetting of market prices to what they should have been all along? In fact, isn't the central banks manufacturing of inflation an attempt to engineer the maintenance of prices that have clearly been shown to be excessive, despite their mandate of maintaining the value of the currency.


Inflation is dead. What absolute bull. Inflation of assets is dead. The bankers are nervous. They get the money for almost zero interest in exchange for overpriced assets but are having trouble getting new loans to everyone except governments. (Deflation: No ordinary accident, November 20)
The rest keeps rising.
Governments have thus become dependent on insolvent bankers and are themselves insolvent.
Central bankers are keeping the whole system alive by printing more so the bankers can make "profits" from government lending.
Meanwhile private enterprise is shrinking. The only short circuit available is to let the insolvent bankers go under along with their sovereigns.
If not, it will happen anyway. Only at that point the major currencies will be printed to worthlessness.


I believe we should depend more on our own common sense rather than government statistics. (Deflation: No ordinary accident, November 20)
The US Federal Reserve is buying $40 Bn per month of federal government debt[bonds and treasuries],that's $480 Bn per year.
That is $480Bn of money that the Fed pulls out of the sky and the federal government spends it in the economy.
That's inflation.
If we are talking about price inflation,I advise everyone who relies on their spouse to do the shopping to please accompany them in future.Then they will realise that price inflation is more like
6% and rising fast!


Inflation is very high in some demand driven sectors of the economy, such as mining construction, health services and electricity supply. Deflation has occurred in other optional expenditure areas such as housing, retail and tourism. There is no meaningful inflation figure. (Deflation: No ordinary accident, November 20)


I agree with the thrust, Stephen, but you fall into the same trap as many other commentators by confusing low interest rates or QE with 'most stimulatory' or 'super easy' monetary policy. As the market monetarists have highlighted, and as Bernanke noted in 2003:
"As emphasized by Friedman (in his eleventh proposition) and by Allan Meltzer, nominal interest rates are not good indicators of the stance of policy, as a high nominal interest rate can indicate either monetary tightness or ease, depending on the state of inflation expectations. Indeed, confusing low nominal interest rates with monetary ease was the source of major problems in the 1930s, and it has perhaps been a problem in Japan in recent years as well."
Bernanke went on to say:
"Ultimately, it appears, one can check to see if an economy has a stable monetary background only by looking at macroeconomic indicators such as nominal GDP growth and inflation."
Here is the link:


This is a very interesting discussion debate. I have been critical of Stephen in past, but this was interesting. (Deflation: No ordinary accident, November 20)
I have repeatedly sought and repeatedly seek to provide input from High Street as to what is happening in SME sector as a: valuer of leases (outcome current market value of asset); non-practicing economist; leasing consultant; analyst; etc.
Here are two examples of inflation. And deflation.
And stupidity. I posted this on my LinkedIn discussion page. And as usual I am not very diplomatic. As stupidity is involved.
“If there is any doubt in what I am saying/have said: figure this logic out. This country throws capital and RETURN away (Australia) out of stupidity. From Macquarie research "Blackstone acquires Top Ryde City for $341m. In the AFR, Blackstone Group has bought the Top Ryde shopping centre in Sydney from receivers McGrathNicol for $341 million. The centre was valued at over $840 million four years ago. "
We have red ink on the floor: finance capital; shareholder capital; landlord capital; no doubt some development capital; and tenant capital. Because the market is not working. ………….. If market rent was being paid, and market "value" was being valued i.e. leases being properly valued by valuers, this market would not be so dysfunctional. The sooner we change the "culture" of the shopping centre industry, the sooner this sector of the economy will start contributing to the nation's wealth. But again prime cash-flows get taken out, because someone else has cherry-picked good assets. Please WAKE UP.”
Two other factors: 1. The ATO cannot/does not collect taxes and becomes banker of last resort as landlords get their money rent in advance well above current market rent; 2. We work hard to build up an asset, manage it poorly, it self-destructs, stuck into too hard basket. And flog it.
Why do we keep flogging off our cash-flows?


Thanks Stephen, a good article. (Deflation: No ordinary accident, November 20) We are in an era, where money has no backing. It is merely a tradeable commodity. Australia, has absolutly no control over our economy. Only sovereign FOREX traders do.
Notice that debt, deflation and deleveraging all start with borrowed money.
Its like saying that the carbon tax has no effect. Until you look at the pieces, that go into building a house (baked roof tilex, cement baked bricks etc).
Australia can alter its terms of trade, by buying less imported oil, buying fewer imported cars etc.
Its actually not hard, when you think outside the box. But we just love to gamble with our future and its called debt.


Inflation has been 6% for many years, unless of course you buy a new TV set every two weeks. (Deflation: No ordinary accident, November 20) Health insurance, school fees, food, transport, house insurance, rates, electricity are all going up at an alarming rate.
Also, in normal times, with the GFC we would have seen bonds for countries go through the roof as their economies went down the gurgler. However, this time, we have governments printing more money and then buying it all back so it didn't cause the spike in bond rates. Europe has the problem of individual countries having to borrow but they can't print more money because they are stuck with the euro.This economic madness that we are seeing around the world of printing more money will eventually come to an end and it won't cause growth in their economies as they are hoping. It will however cause a lot of bankers to make a lot of money.


If inflation is dead, why do supermarket prices keep rising and why are electricity and gas retail prices completely out of control? (Deflation: No ordinary accident, November 20) The selective inflation data upon which the economists rely is obviously a complete fiction in relation to real world living costs. Geoff Croker (November 20, 9:44AM) is right - the central bankers "assets" around the world are getting smellier and more rotten by the day, and these bankers are producing "profits" out of thin air by money printing and kicking the can further down the road. It will catch up to them eventually - but they will continue to socialise the losses unless we have an FDR style politician elected somewhere who can regain some sort of ethical control of the world banking system and proper separation of the retail and "investment" banking systems.


Interesting. Seems the problem will also be whipsaw magnified on the other side when we have a global recovery. (Deflation: No ordinary accident, November 20)
At the moment, governments can borrow an infinite amount of money and service their debt at zero interest rates. When any recovery comes through economic theory says that rates have to rise. (Question is do they always have to rise under these conditions?)
If so, governments will have an expanded economy to start paying down the infinite borrowings, but will governments be able to take discretionary spending out of the economy quick enough to rebalance their debt?


The great monetary experiment is coming to an end ( Deflation: No ordinary accident, November 11). Deflation and inflation of goods measured in fiat currencies is a red herring. True deflation in real money has been rampant for a decade. The price of everything has fallen if measured in ounces of gold. The central banks are attempting to prevent systemic collapse and in doing so are creating social unrest. The biggest beneficiaries of QE are the 1% as if the system DID actually collapse, workers that had a job would benefit by massively lower prices and the ones who lost their jobs would do as P. J. O'Rourke prophetically suggested and Eat the Rich! ;)


Stuff is deflating but everything which is regarded as a necessity has risen way above inflation (Deflation: No ordinary accident, November 20). Health, Education, Electricity, rates, water, rent, insurance you name it has gone through the roof which will ultimately bring on asset deflation as people cannot afford to buy property and shares.


Has the author (Deflation: No ordinary accident, November 20) researched what is in the basket for CPI/RPI? CPI/RPI basket is fudged to make inflation look low. The increase in house prices of 20% in 2010 didn't feed in but people sure paid for it with mega mortgages and still paying for it now.
As noted and I agree, if you go into a supermarket you can see.
They recently shrunk frozen green peas at my supermarket in the UK from 1kg to 900g and keeping it at the £1 price point. How much is a frozen bag of green peas in Australia? Don't say UK is a basket case, I've doubled my income in the last 4 years and sit in the top 10% of the population. Just talking purchasing power parity, Australia has had run away inflation in the last decade not the 2.5% officially published.