Threat of Inflation Is Overblown

One of the most common bits of post-recessionary wisdom is that the world is on its way to a prolonged period of high inflation. With all that public stimulus money sloshing around the world, it's only a matter of time before prices start to go up. And indeed, that's exactly what's happening in China and India, mostly because they didn't experience much of the recession. But in the rest of the world, where economies really did nosedive, inflation worries may be overblown.

A recent Bank of America/Merrill Lynch report notes that in 18 of the world's 30 richest developed economies, core inflation (not including food and energy) is down from its peak in 2008, and continues to fall. High unemployment, empty offices, and shuttered factories have put extra slack in developed economies, meaning there's little pricing power for anyone, and thus little chance of inflation in the near term. "It's a myth that we're following a straight line from disaster to inflation," says BOA/ML economist Ethan Harris, who foresees two or three years of flat prices in the U.S., Europe, and Japan, which should provide some breathing room to get growth going. The risk is that policymakers will exit from stimulus programs too soon. The recovery remains weak; it still needs low interest rates and fiscal stimulus to get job creation up and bad bank loans back down. So while China and India may be ready to sprint, America's economy still needs physical therapy.