Deflation Risk Has Become The Number One Public Enemy In The Global Central Bank.

Recently, the International Monetary Fund (IMF) released the October global economic outlook (WEO) report.

In the third chapter, IMF expressed concern about the decline in inflation in a wide range of countries and regions.

"As of 2015, the inflation rate of more than 85% economies was lower than medium-term expectations in a wide range of samples from more than 120 economies, of which 20% of the economies were in fact deflationary."

IMF believes that the current

Has not yet been greatly affected.

However, in economies with near zero interest rates, the effectiveness of monetary policy in combating inflation continues to decline.

IMF calls on relevant countries to implement appropriate policy mix measures to avoid downward expectations of inflation and thereby undermine economic activity and employment.

The IMF study found that the prices of tradable consumer goods, such as automobiles and televisions, are more clearly reflected in the price of services than in services such as communications and financial services.

Moreover, the decline in inflation is mainly due to the continued idle capacity of domestic economies (due to weak demand and growth) and the fall in commodity prices.

IMF's research also found that idle industrial capacity in large exporters might have depressed the prices of global tradable goods, resulting in a decline in inflation.

As for the recent drivers of inflation, the sharp drop in oil prices since 2014 is partly due to the fact that in most developed economies, recently, many emerging market economies, core inflation (excluding food and oil prices) has also fallen below the central bank's inflation target.

Although inflation in all sectors has declined, producer prices have fallen more sharply than those in the service sector.

In response, IMF also said that in developed economies and some emerging market economies, weak demand and continued economic idle capacity 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.

Indeed, in some large economies (IMF, especially China), the investment in tradable sectors has grown strongly after the global financial crisis, based on forecasts of global and domestic demand, although it has been proved that this prediction has not been achieved.

"The excess capacity generated by these economies creates downward pressure on the international prices of tradable goods, which in general means the decline in import prices in other parts of the world."

The report says.

Inflation has always seemed to awe some countries, especially Germany, which once faced hyperinflation.

However, inflation without a certain level is equally dangerous to the economy.

IMF believes that, 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.

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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 high costs.

As in Japan, the weakening of demand and the intensification of deflation eventually aggravate the debt burden and inhibit 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 inflation expectations in these countries are "anchored" with the central bank's objectives.

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

At the beginning of the year, the Bank of Japan launched

However, 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.

In September 21st, this dilemma was once again evident in the central bank's policy meeting.

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.

The report said, "in general, this means that while continuing to take a loose monetary policy, we will implement fiscal policies conducive to economic growth, income policies (in countries where wage growth stagnation) and structural reforms supporting demand, while addressing problems left over by the crisis (debt accumulation and massive non-performing 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 burst, a large number of private sector (enterprise and family) balance sheets will then be in the state of insolvency, thus large-scale suppression of economic activities, resulting in a sustained 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 assessment, the risk of inflation is generally declining, and the risk of pforming it into a destructive deflationary 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."