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Central Banks Fret Over Too Little Inflation

“The rise in consumer prices slowed across the world’s largest economies in December, fueling concerns that too little inflation, rather than too much, could threaten the global economy’s fragile recovery.

The Organization for Economic Cooperation and Development Tuesday said the annual rate of inflation in its 34 developed-country members rose to 1.6% from 1.5% in November, while in the Group of 20 leading industrial and developing nations it fell to 2.9% from 3.0%.

Although up slightly, the low level of inflation across developed countries will worry central bankers, since many regard annual price rises of 2% as consistent with healthy economic growth. The rise in the inflation rate was driven by higher energy prices, while the core rate of inflation—excluding energy and food—was unchanged at 1.6%.

When inflation is low, companies, households and even governments have a harder time cutting their debt loads, a particular problem for a number of highly-indebted nations in the euro zone.

When prices start to fall, consumers can postpone purchases in the expectation that they will get better value for their money in the future. That can in turn weaken economic activity, and create further deflationary pressures. Following the difficulties Japan has experienced in getting out of its long period of deflation, central banks in other countries are anxious to avoid a similar struggle.

The threat of low inflation, and the possibility that prices may start to fall, is most pressing for the European Central Bank, whose governing council meets Thursday. Figures released last week showed consumer prices in the euro zone rose by 0.7% in the 12 months to January, a decline in the annual rate of inflation from 0.8% in December…..”

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