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Feature: Calm before the storm
05 May 2010
Are we heading for inflation or deflation? A strong case can be made for each argument but for now perhaps the answer lies somewhere in between
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inflation
deflation
It is striking how the current volatile market conditions have divided expert opinion on the crucial issue of inflation. The colossal programmes of monetary stimulus launched by governments around the world, combined with rising commodity prices, would suggest a rise in core inflation. But the squeezing of domestic demand by increased living costs, higher taxes and high unemployment point to deflation. Others seem to hedge their bets by arguing that we are currently in a deflationary environment with inflation on the way.
In the past, periods of deep deflation have been followed by excessive inflation, as happened in Germany after the First World War or in Japan in the 1990s. In a deflationary environment of high debt, low nominal income growth and low savings, governments respond by stimulating the economy, as has happened over the past year. The problem then is that, in a bid to borrow its way...
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