Focus: On the global rebound

In contrast, the Fed today has a policy of fighting deflation risks and thus is likely to retain its easy policy for an extended period of time. Since a major premature tightening from the Fed is unlikely, a double dip isn't expected.

In the great debate about deflation risk and inflation risk, the Federal Open Market Committee is on track when it says “the Committee sees some risks that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term”.

The massive global excess supply of labour and productive capacity will contribute to downward pressures on wage inflation and price inflation. The inflationist argument is that rapid money supply growth ensures a major upsurge in inflation. Is this really true? There has been a downtrend in velocity. As financial innovation has gone into reverse with the meltdown of the shadow banking system, strong money supply growth is not yet generating a quick rebound in nominal GDP growth.

Whether today’s monetary growth will generate a major acceleration of inflation in three or four years will depend on the independence and judgment of the central bank in the intervening years in withdrawing liquidity as the financial system normalises. Over the next year or two, however, inflationary pressures should be negligible. In the early phases of demand reflation, productivity growth tends to be quite rapid as the production rebound can be accommodated more by mobilising under utilised resources than by adding productive capacity or new workers. Inflation is almost always low in the early reflation phase of the cycle.

Richard B Hoey is chief economist at BNY Mellon Asset Management