Federal Reserve policy meet: Bill Gross backs Paul Krugman's view on inflation

NEW YORK: When it comes to lowflation, 2014 will have proved to be a banner year. For the first time in at least 55 years, not one advanced economy will see consumer prices growing more than 4 per cent this year. Even as recently as 2011, a quarter of rich nations recorded a rate at or higher than that.
Indeed, across the Organization for Economic Cooperation and Development, average inflation excluding food and energy hasn't breached 2 per cent since the start of 2009 -the longest stretch of weakness since data began 43 years ago. Furthermore, consen sus forecasts for inflation have been trending down since late 2012, the lengthiest run of downgrades since the end of the 1990s.

Such factoids, courtesy of a December 1 study by Citigroup economist Michael Saunders, highlight the world of lowflation, a term coined earlier this year by the International Monetary Fund to describe an extended period of ultra-low inflation. Looking forward, Saunders doesn't see average inflation in any rich economy topping 3 per cent from 2015 to 2019.

It is that, more than Russia's man-made economic implosion, which probably poses the biggest international concern for US Federal Reserve policy makers meeting in Washington on Wednesday.

`NO! NO! NO!' “The Fed is in a corner -it wants to raise rates in 2015 but Oil Dollar Disinflation say NO! NO! NO!!“ billionaire investor Bill Gross of Janus Capital Group wrote on Twitter on Tuesday.

Citigroup and Nobel laureate Paul Krugman agree. Citigroup doesn't see the Fed acting before next December, while Krugman said December 14 it could hold fire for the whole of next year as officials conclude “it's a pretty weak world economy out there, we don't see any inflation.“

The betting is still that with US labor markets tightening and cheaper oil boosting purchasing power Chair Janet Yellen and colleagues will dump a pledge not to raise interest rates for a “considerable time.“ The median estimate of economists surveyed by Bloomberg News is that will pave the way for the first US rate increase since 2006 in the third quarter of next year.

Why should the Fed worry about low inflation abroad when unemployment is sliding at home? Saunders' colleague Jeremy Hale has the answer in arguing the US is increasingly exposed to foreign price pressures. By easing monetary policy further, central banks in Europe and Japan are set to weaken their currencies next year, forcing up the dollar in response, he said in a separate report last month.

By doing so they will export their weak inflation to a US which is now a more open economy than it once was. Hale reckons that the sum of exports and imports in the US is now six percentage points higher than when the Fed last started tightening in 2004.