We often hear that America won't suffer a lost decade' and persistent deflation like Japan, says Capital Economics. The Fed slashed interest rates and printed money much faster than its Japanese counterpart, so the danger should be averted. But this analysis overlooks two awkward facts.
Firstly, America's growth performance has been worse than Japan's during the first few years of its crisis (see chart). Secondly, US core inflation (that's inflation minus volatile food and energy prices) has been following an "uncannily similar" course to the Japanese post-bubble figure. In Japan, core inflation only slipped below the zero line nine years after the crisis began. "Resistance among firms and households to price and wage cuts means that disinflation happens only gradually." So the idea that if America were going to slump into deflation, it would already have done so doesn't stand up. America is "already half-way through a lost decade" and it's hardly a stretch to imagine another five lousy years.
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