Central banks are finding it’s easier to push up stock and home prices than it is to prevent inflation from falling short of their targets.
While declining costs for everything from gasoline to coffee can be good news for consumers, disinflation makes it harder for borrowers to pay off debts and businesses to boost profits. The greater danger comes when disinflation turns into deflation, which leads households to delay purchases in anticipation of even lower prices and companies to postpone investment and hiring as demand for their products dries up.
“There is definitely a whiff of disinflation again taking hold globally,” Robert Sinche, global strategist at Pierpont Securities Holdings LLC in Stamford, Connecticut, said Nov. 5 on Bloomberg Radio’s “Bloomberg Surveillance.”
Federal Reserve Chairman Ben S. Bernanke and his central- bank counterparts are trying to avert the deflationary danger by pumping up their economies with lower interest rates and monetary stimulus. They have bet the run-up in stock and home prices they’ve engineered would boost consumer and corporate confidence and spur faster growth and higher inflation. Now they’re having to maintain or intensify their aid -- running the risk those efforts do more harm than good by boosting equity and property prices to unsustainable levels.
“You have a wall of liquidity” that’s “leading to asset inflation and eventually to bubbles,” Nouriel Roubini, chairman of Roubini Global Economics LLC, said Nov. 7 on Bloomberg Television’s “Street Smart.”
Global inflation will be about 2.8 percent this year, the second-lowest since World War II, amid high unemployment in developed nations and slowdowns in emerging markets, according to Bruce Kasman, chief economist at JPMorgan Chase & Co. in New York. Even after policy makers slashed interest rates and bought bonds, about two-thirds of 27 inflation-targeting central banks tracked by Morgan Stanley still are undershooting their goals or watching prices rise in the lower end of preferred ranges.
“We have seen, in the last months, deflationary tensions building up,” Laurent Freixe, executive vice president of Nestle SA, the world’s biggest food company, said in an Oct. 17 conference call. “There is no growth in the marketplace, so everyone is fighting for a share of a shrinking pie.”
The European Central Bank surprised investors last week when it unexpectedly halved its benchmark rate to a record low 0.25 percent to combat what President Mario Draghi called “a prolonged period of low inflation.” A slew of emerging markets -- including Israel, Chile, Hungary, Sri Lanka, Peru and Mexico -- also have eased policy since September began.
Fed officials repeatedly have stressed their intention to keep their target for short-term rates near zero until the U.S. economy and inflation pick up, even as they consider whether to start reducing their $85 billion in monthly bond purchases.