Introduction
Deflation has become a hot topic, and for obvious reasons. Commodity prices are collapsing, long-dated bond yields have accelerated their decline and many of the commentators argue that some of the world’s largest central banks are waging currency wars. With all these deflationary signals flashing in front of our eyes, the annual rate of change of consumer prices turned negative in a number of economies and remains on a stubborn downward trajectory in the rest of the world.
Consumer Prices in the US Have Fallen Substantially
Here is how the Fed’s language on inflation evolved over the past several months, as the markets further pushed out the expected date of the first rate hike (emphases mine):
September 17, 2014:
Inflation has been running below the Committee's longer-run objective. Longer-term inflation expectations have remained stable.
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