The Deflation Bogeyman
BRUSSELS – Central banks throughout the developed world have been overwhelmed by the fear of deflation. They shouldn’t be: The fear is unfounded, and the obsession with it is damaging.
Japan is a poster child for the fear. In 2013, decades of (gently) falling prices prompted the Bank of Japan to embark on an unprecedented monetary offensive. But while headline inflation increased for a while, the factors driving that increase – a competitive depreciation of the yen and a tax increase – did not last long. Now, the country is slipping back into near-deflation – a point that panicked headlines underscore.
But, contrary to the impression created by media reports, the Japanese economy is far from moribund. Unemployment has virtually disappeared; the employment rate continues to reach new highs; and disposable income per capita is rising steadily. In fact, even during Japan’s so-called “lost decades,” per capita income grew by as much as it did in the United States and Europe, and the employment rate rose, suggesting that deflation may not be quite as nefarious as central bankers seem to believe.
In the US and Europe, there is also little sign of an economic calamity resulting from central banks’ failure to reach their inflation targets. Growth remains solid, if not spectacular, and employment is rising.
There are two key problems with central banks’ current approach. First, they are focused on consumer prices, which is the wrong target. Consumer prices are falling for a simple reason: energy and other raw material prices have declined by more than half in the last two years. The decline is therefore temporary, and central banks should look past it, much as they looked past the increase in consumer prices when oil prices were surging.
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