Mario Draghi may have offered reassurance last week that the eurozone is not facing a Japan-style deflationary lost decade but, frankly, his reassurance is not terribly convincing. Japan’s problems were partly a reflection of a collective failure to foresee the deflation heading its way.
Over the past 12 months, inflation throughout much of the world has dropped like a stone, ending up at levels wholly unanticipated at the end of 2012. If Japan’s problems partly stemmed from a failure to spot the onset of deflation, might it be that policy makers in the west could be sleepwalking into the very same problem? After all, inflation in both the US and the eurozone is now well below target, a result that should at least give central bankers pause for thought. Continue reading »