Are we really talking about the threat of deflation or perhaps should we be describing the current episode as negative inflation? It’s an important distinction: deflation is a persistent trend of falling prices, leading to delays in spending, weaker economic growth, higher unemployment and further falls in prices. That’s more serious than a sharp fall in oil prices producing short term declines in the CPI. We think the decline in oil is mostly supply-side driven rather than demand-driven. The bond markets are not so sure with declining inflationary expectations and lower real yields priced in.
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