Around the World, Inflation Is Falling to Levels Not Seen for Years

The New York  Times

November 15, 2013

By FLOYD NORRIS

AMERICAN inflation, which has seemed to some conservative economists to be an impending threat ever since the Federal Reserve began to buy large quantities of government securities, appears to be falling to levels lower than any seen in recent years. There are similar declines in many European countries.

The decline in the inflation measure most watched by the Federal Reserve — the personal consumption expenditures deflator — could provide a reason for the Fed to delay the widely expected tapering of bond purchases. Last week, the government reported that the price index had risen only 0.9 percent over the 12 months through September. “Fed officials have said that their ultra-easy monetary policy is justified not only by weakness in the labor markets but also by declining consumer price inflation, especially if it gets too close to deflation,” Ed Yardeni, the chief investment strategist of Yardeni Research, wrote this week. “They’ve indicated that even if the unemployment rate falls down to 6.5 percent, they might be in no rush to tighten policy if inflation remains too low.”

The unemployment rate in October was 7.3 percent, and the Fed had not been expecting the personal consumption expenditures inflation rate to fall as low as it has.

Inflation has also been falling in Europe, where the European Central Bank cut interest rates last week in response to a surprising estimate that consumer prices in the euro zone rose just 0.7 percent in the year through July.

This week, Britain reported that its annual inflation rate fell to a four-year low of 2.2 percent. France reported that its annual inflation rate was just 0.6 percent, also a four-year low. The latest rates in Germany (1.2 percent), Spain (1.3 percent) and Italy (0.8 percent) are three-year lows.

The exception to the trend is in Japan, which has been plagued by deflation for years. The latest report showed no change in consumer prices over the previous 12 months, a welcome sign to the Japanese government, which has been aggressively trying to turn around the economy.

Lower oil prices have played a role in keeping inflation down this year. But as can be seen in the accompanying charts, the core inflation rate, which excludes volatile food and energy prices, is also low, at 1.2 percent over the most recent 12 months.

One sector that is helping to hold down inflation is durable goods, where prices continue to fall.

Perhaps the most surprising part of the latest American inflation report was that the cost of health care services in the third quarter was just 1.1 percent above the level of a year earlier. That was the smallest annual increase since 1962. If health care costs were to rise less than expected over the next few years, that would do a lot to relieve the budget pressure brought on by expected increases in Medicare costs.

Central banks now generally target an inflation rate of 2 percent, and view figures below that potentially as alarming as figures above it. At a news conference in September, Ben Bernanke, the soon-to-retire chairman of the Fed, said, “The committee would be unlikely to increase rates if inflation were projected to remain below our 2 percent objective for some time.”