Global Disinflation Threat Reconsidered

At present, inflation rates in several large economies, including the United States, Eurozone, United Kingdom and Japan, are well below their target levels set by monetary policy makers. In addition, several economic and financial factors have put downward pressure on inflation rates around the globe. That is, in many developed economies, economic growth rates are subpar, and the plunge in oil prices and commodity prices along with recent volatility in global equity markets renew the question of a global disinflation threat. In what may be a surprise for some, the PCE deflator for the United States has averaged below 2 percent since 1991 (Figure 1). This leads us to wonder if the 2 percent target is in fact high relative to recent experience. 

In our previous research work, we developed an early warning system (EWS) to predict the nearterm probability of inflationary/deflationary pressure for the global economy. 2 Specifically, we utilized an ordered probit approach to estimate the six-months-ahead probability of three distinct price scenarios: inflationary pressure, deflationary pressure or price stability. 3 Here we build models for five geographic regions to gauge each region’s inflation outlook. Our first model assesses the inflation/disinflation outlook for the global economy, while the second model generates the likelihood of each inflation scenario for the advanced economies.