Inflation Without A Certain Level Is Dangerous For The Economy.

In developed economies and some emerging market economies, weak demand and continued economic idle capacity have led to recent decline in inflation.

But low import prices also play an important role in lowering inflation.

This partly reflects the decline in the prices of oil and other commodities, but this study points out that the impact of falling import prices on domestic inflation is also related to idle industrial capacity in major economies.

In general, a brief decline in inflation is not a problem to worry about.

For example, a temporary drop in inflation caused by supply factor driven energy prices or productivity gains may be beneficial.

However, as the economics textbook says, if inflation keeps falling, companies and households will lower their expectations of future prices, and they may delay spending and investment decisions, which will cause demand contraction and exacerbate deflationary pressure.

In the end, "sustained" inflation may lead to costly deflation cycles, just as what happens in Japan, that is, the weakening of demand and the intensification of deflation, eventually increasing the debt burden and suppressing economic activity and employment creation.

Therefore, IMF believes that a key factor that should be considered is the expectation of future price paths.

Today's price drop may be a factor in people's future price expectations.

"Therefore, the ability of the central bank to support its inflation target as a fulcrum and anchor its medium-term inflation expectations helps to avoid the phenomenon of high cost inflation."

Fortunately, so far, most of the existing indicators of inflation expectations have not yet declined significantly.

But IMF's research shows that in countries where interest rates are at or near zero, the central bank may be considered to have little room to promote economic activity and raise inflation.

In fact, the study found that the sensitivity of inflation expectations to unexpected inflation changes, which should be zero when inflation expectations are fully anchored, is rising recently.

This means that in these countries, inflation expectations are "anchoring" with the central bank's goals.

The BoJ's position this year is the best example.

At the beginning of the year, the Bank of Japan launched negative interest rates, but the Japanese yen rose violently and became the most powerful currency in 2016. This shows that the central bank has already been unable to ease the market. Since then, the Bank of Japan has expanded the purchase scale of ETF, but it is still useless.

Also in September 21st, this dilemma was once again in existence.

The policy meeting is full of details.

Although the Bank of Japan does not act much, it has also made two new highlights: 1) yield curve control: it will continue to buy Japanese treasury bonds until the 10 issue yields to 0.

The move is intended to ease the pressure on Japanese banks and other financial institutions to reduce the cost of negative interest rates.

2) inflation overshoot, which promises to expand the base money level until CPI exceeds 2% and is above 2%.

However, this seemingly "high-profile" plan has not been warmly reacted by the market, and the US dollar / yen has fallen to 100.

In the face of the current predicament, IMF calls for the use of all available policy instruments in an integrated and coordinated way to promote demand and stabilize inflation expectations.

Avoid the risk of inflation being lower than the target level for a long time and eroding the credibility of monetary policy, especially in developed economies.

"In general, this means that, while continuing to take a loose monetary policy, it will help," the report said.

"Fiscal policy, income policy (in countries where wage growth stagnates) and structural reforms supporting demand" also solve the problems left over by the crisis (debt accumulation and large number of banks' bad loans).

It is undeniable that the challenges faced by countries at present are arduous.

In fact, Gu Zhaoming, chief economist at Nomura Institute, pointed out the crux of the problem - the balance sheet recession.

This concept means that when the national asset price bubble bursts, a large number of private sector (enterprise and family) balance sheets will then be in the state of insolvency, thus large-scale containment.

The resulting recession.

After the crisis, the recession of the developed economies in Europe and the United States stems from the real estate bubble burst and the subprime mortgage crisis.

In order to reverse the situation of insolvency, the private sector's economic behavior is pformed from seeking maximum interests to seeking debt minimization. Enterprises will spend most of their income on debt repayment instead of reinvesting, not to mention borrowing money from banks. Families will also spend most of their income on debt repayment while reducing consumption.

Therefore, this partly explains why the central bank has been loose for many years, and still can not inject capital into entities and boost inflation.

It is clear that inflation expectations are quite important.

According to IMF, the risk of a general decline in inflation into a destructive deflation trap is still small.

"But the fact has proved that once deflation is dynamic, it will be very difficult to reverse, so countries should not take it lightly."