Lowflation

Prices rise to absorb the amount of money available.
Prices fall to match the amount consumers are willing to pay.

   Too much inflation is a bad thing, experts say, leading to runaway prices and the inability of workers to keep up. Now comes a warning that too little inflation isn't so good, either.
   Central banks try to keep the money supply from increasing at more than 2 percent, figuring that's a reasonable level to encourage economic growth without the problems of accelerating too fast. In general, central banks pump up the money supply to hold interest rates down, which encourages borrowing for expansion, thus leading to economic growth. But this has not been working.
   Now a study by the International Monetary Fund says that "even low inflation -- let's call it 'lowflation' -- can be problematic," and called on European Central Bank to reduce interest rates and make more cash available throughout the European economy.
   Pumping more money into the economy is what the Federal Reserve -- America's central bank -- has been doing, but has been talking about easing off as the nation's economy shows signs of recovery.
   In Europe, there have also been signs of recovery, but while very low inflation benefits some, the IMF report said that "in the current context of widespread indebtedness," it's detrimental to recovery in the euro area, especially in "fragile countries" where it thwarts efforts to "reduce debt, regain competitiveness and tackle unemployment."
   So there's a risk to a long period of low inflation, according to IMF chief Christine Lagarde, and central banks should be ready to prevent a stumbling recovery from falling.
   Falling prices, or deflation, may sound like a good thing, but the reality is that such a phenomenon can set off a renewed recession -- or worse. And at its least, stable prices can intimidate growth.
   The current problem is partially this: Firms borrow at low interest rates but use the funds to pay down older, higher rate debt and don't use the money for investment in new capacity. Result: Production is stagnant because consumer demand is holding steady. There's no reason to boost supply if demand isn't there.
   Meanwhile, demand may fall further as consumers see a possible trend of still lower prices. Moreover, those out of work have little choice but to trim spending.
   Put all those factors together, and you get a downward spiral. And that's what has economists worried.

    You wouldn't know it from the Beige Book, though. The latest summary of economic conditions in the U.S. said the economy "continued to expand" from January to early February. Eight of the twelve Federal Reserve districts reported "improved levels of activity," the report said, "but in most cases the increases were characterized as modest to moderate."
   And while that's not bad news, it's not time to toss a party, either. The most recent report on GDP (Gross Domestic Product) in the U.S. showed a slowdown in the growth rate. And in Europe, high debt levels continue to hold back momentum, according to IMF chief Christine Lagarde. In a speech earlier this week in Spain, she noted that the risk of low inflation -- substantially below the price stability goal of 2 percent -- "is also looming and could derail the recovery."
   That 2 percent inflation rate guideline is the same one used by the Federal Reserve in the U.S. But inflation in the U.S. was pegged at 1.6 percent in January, according to government figures, despite Fed's "quantitative easing" campaign to bring it to 2 percent.
   Separately, Reuters reported that the Bank of Canada is still worried about weak inflation, as the nation posted an inflation reading of 1.5 percent in January. Moreover, the bank said it expects inflation to be "well below target for some time," at least through the rest of this year.