Deflation

The ogre stalking the world’s weak economies in recent years wasn’t the one people had learned to fear. The monster wasn’t inflation but its opposite: falling prices. Its name is deflation and it appears friendly. Why be afraid when the cash in people’s wallets buys more fuel and televisions, not less? Because when deflation grabs hold, companies and consumers can stop spending. It strangles borrowers because their debts get harder to repay — a menace for countries struggling to recover from the 2009 global recession, the worst in a generation. In this fairy tale, inflation comes dressed in shining armor as policy makers debate how to create just enough of it to keep deflation at bay.

Six years after the 2008 financial crisis turned the global economy upside down, a slide in prices threatened to drag out the turmoil. Europe’s economies had failed to recover the momentum needed to stimulate slow-but-steady price increases, which most central bankers consider desirable. The European Central Bank unveiled a bond-buying plan in January 2015 in a once-and-for-all push to revive inflation after euro-area prices fell in December for the first time in more than five years. Denmark, Sweden and Switzerland introduced negative interest rates. The stimulus stopped the rot, helped by a pickup in economic activity in the U.S. and other rich nations. Japan, too, kept up bond buying in an effort to shake off more than a decade of deflation and stagnation, though price gains remained far short of the central bank’s target of 2 percent.