R.I.P., inflation. You had a good run, but it's over now that prices are rising less than 1 percent in the United States, United Kingdom, Europe, China, and Japan.
Now this isn't the first time that inflation has died. The Black Death killed it, along with a third of Europe's population, for most of the 1400s. Then it came back, but disappeared again every time there was a big financial crisis: in the 1830s, the 1870s to 1890s, the 1930s, and 2009. This last time, though, was different—well, at least at first. Prices only fell for a very little while before inflation rebounded back into positive territory. No, it never got that high, but the U.S. and U.K. were able it to keep it from falling too far below their 2 percent inflation targets by buying bonds with newly-printed money. Even Japan, which had been stuck in deflation for decades, was able to get its price rising again when it started doing the same.
But then oil prices started falling, and inflation did too. You can see that in the chart above: outside of Europe, inflation was between 1.5 and 2.5 percent before crude collapsed, and it fell below 1 percent everywhere. Now this is good and bad news. The good part is that lower oil prices put more money in people's pockets for them to spend. But the bad part is why oil prices are so low. Sure, a lot of it's about the new supply that's come online from fracking. But economist Jim Hamilton estimates that 44 percent of it is because of decreased demand. The global economy, in other words, is slowing down again.
The problem is credit bubbles. Just when the world gets over one of them, another one bursts and drags everyone down again. Japan's popped first in the early 1990s, and it's never fully recovered from it—though it's trying harder now. Then there's Europe, which, with its debt, deflation, and 11.4 percent unemployment, is well on its way towards becoming the next Japan, or worse. The U.K. is just beginning to bounce back from its own burst bubble—its premature austerity didn't help—but the foundations of its recovery are still shaky. The U.S. has, believe it or not, done better than almost every other post-bubble economy (which doesn't mean it couldn't be doing even better with better policy), but now its relative strength has become a weakness as the dollar has gone up too much. And finally, China is starting to look a little wobbly itself now it's substituted its export-led growth model for a credit-led one. It has its own housing bubble, and shadow-bank-fueled debt explosion, up 75 percent of GDP, that sure looks unsustainable.
Put it all together, and you get falling demand that's turning into falling inflation. Central banks, for their part, are trying to push prices up by pushing interest rates down even below zero, but it hasn't been enough so far. At some point, if they really, really want to, they should be able to revive inflation—after all, they can print as much money as they want—but for now it's dead.
Inflation is just a scare story people old enough to remember the 1970s tell.