Deflation or inflation?

EVER since the global economy started to "recover" from the global financial crisis in 2009, a constant concern has been that all the money printing by central banks in the US, Europe and Japan will result in sharply higher inflation in developed countries. This has not happened. In fact, over the last couple of years inflation has been falling, with the US, Europe, Japan and Canada all having inflation rates of one per cent or less. Australia has relatively high inflation but it is only 2.2 per cent. Oddly enough, currently inflation is really only an issue in some emerging countries - notably Brazil, Indonesia and India - where it reflects a combination of slowing productivity growth and cost pressures. But that's a separate issue.

The plunge in the price of gold from a peak of US$1,900 per ounce in 2011 when hyperinflation fears were at their peak to around US$1,240 now is another sign that inflation pressures are weak.

Why those predicting hyperinflation over the last few years have been wrong is very simple. Put simply, they did not understand the link between quantitative easing (QE) and inflation. While central banks have boosted narrow measures of money - bank reserves and cash in the system - this needs to be lent out en masse, boosting broad measures of money supply growth and credit, and resulting in much stronger levels of economic activity and the elimination of excess capacity before inflation takes off. And, of course, this hasn't really happened. So no hyperinflation. Too bad for the gold bugs!