- The protracted weakness of inflation during the past cyclical upswing caught central banks and investors by surprise.
- There are several, partial explanations for this phenomenon, ranging from the impact of globalization, changes in the structure of goods and labor markets to the success of central banks to keep expectations in check.
- As the business cycle softens and the risk of “lowflation” reappears, central banks need to rethink their toolbox for a world where inflation is likely to be permanently lower than in the past and increasingly driven by expectations.
- Sluggish inflation has raised fears of a “Japanification” of the US and especially euro area economies. However, we consider low inflation in Japan to be held up by special macro imbalances that do not apply to other countries.
- Too low inflation dents profit margins and equity returns, and slows down the reduction in the real burden of debt, even though low interest rates help solvency in the short term.
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