Why the Inflation Uptick is Set to Reverse

The inflation rate in developed economies climbed from about 0% to 0.5% in the second half of 2016.

The uptick has pleased global policy makers. They want the rise to continue. A common inflation rate target is 2%.

But, one of the big challenges that financial authorities face is a high-level of debt. Globally, there's about $152 trillion of nonfinancial debt. That's 225% of gross domestic product.

A Jan. 21 Bloomberg article mentions other headwinds that policy makers face:

There's reason to doubt that governments can generate inflation as they assume they can.

For one thing, inflation has side effects, secretly transferring wealth from savers to borrowers, particularly when interest rates are held artificially low as they have been since 2009. Higher prices don't benefit those on fixed incomes, such as retirees. In Japan, falling prices have helped preserve the purchasing power of those whose incomes have remained static or shrunk. Such effects will make sustaining higher prices politically difficult. …

Another is that a rebound in commodity prices, especially oil, may be short-lived. Higher commodity prices are reliant on Chinese demand, which is increasingly being supported by risky debt-fueled investment. Oil prices have been driven higher by production cuts recently announced by OPEC, yet countries such as Iran and Russia may not comply with these cuts. Higher U.S. shale oil and gas production may offset reduced production elsewhere.

More crucially, demand remains weak. Growth in U.S. personal consumption, at about 1.6 percent, is below trend, held back by low income growth and job insecurity. U.S. business investment, at around 17 percent of GDP, is also weak and volatile. Aggressive government spending can create additional demand, but whether it is sufficient to offset turgid consumption and investment remains to be seen.

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