Will inflation return – or is “Japanification” the real threat?

SPONSORED CONTENT – Should we actually be concerned about deflation in the wake of Covid-19?

Whatever happened to inflation? Many older readers will remember the 1970s, when investors were terrified that stagflation might storm ahead, thrusting us forward towards a Weimar-style hyperinflationary meltdown. And yet, in recent decades, we’ve been worrying about the precise opposite. Specifically, what concerns policy makers and investors these days rather more, is what has happened in Japan.

Ever since its huge financial crash in the late 1980s, the industrial powerhouse has struggled with inflation’s evil twin, deflation. Put simply, Japan has suffered many years where consumer or retail prices have steadily fallen. This sounds benign, but persistent deflation worries economists. They believe that it creates a feedback loop whereby consumers avoid spending today because they think tomorrow everything might become cheaper. As a result, savings grow and demand in the economy slowly crumbles. Combine that with lower-than-average long-term GDP growth, and mix in an ageing society and chronic government overspending (“fiscal deficit”), and we end up with the scenario now described as “Japanification”.

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