CAMBRIDGE – Until the global financial crisis of 2008-2009, deflation had all but disappeared as a concern for policymakers and investors in the advanced economies, apart from Japan, which has been subject to persistent downward pressure on prices for nearly a generation. And now deflationary fears are on the wane again.
By the mid-1960s, the advanced economies began an era of rising inflationary pressures, ignited largely by expansionary fiscal and monetary policies in the United States, and acutely compounded by the oil price hikes of the 1970s. Stagflation, the combination of low economic growth and high inflation, became a buzzword by the end of that decade. Most contemporary market forecasts extrapolated those trends, predicting an uninterrupted upward march in oil and commodity prices. Inflation came to be seen as chronic, and politicians looked toward price controls and income policies. Real (inflation-adjusted) short-term interest rates were consistently negative in most of the advanced economies.
Federal Reserve Chairman Paul Volcker’s monumental tightening of US monetary policy in October 1979 ended that long cycle. Stagflation gave way to a new buzzword: disinflation, which accurately characterized many advanced economies, as inflation rates fell from double digits.
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