Is inflation dead? The annual rate has fallen to 1 per cent, dangerously close to dropping outside the Reserve Bank's target band.
Last week's Consumer Price Index showed it at just 0.3 per cent for the quarter, the third quarter in a row that it has been lower than economists' predictions.
This kind of problem would have been unthinkable 30 years ago as the damage wrought in the protectionist 1970s came to a dramatic head forcing large-scale eco-
Inflation and deflation -- we must be vigilant about both
nomic reforms in this country. For a generation inflation has been the biggest villain in economics.
Has the battle finally been won? And are we now at greater risk of Japanese style deflation? The debate as to whether there has been a structural shift in the way economists and central bankers should look at inflation has been heating up for a while. Bloomberg economics writer Noah Smith says we've killed it.
"2011 was the year the 1970s ended," he wrote this month.
In something of an inter-generational call to arms he argues that we have central bankers who are failing to let the 1970s go.
Stuck in the monetary policy equivalent of crimplene flares they are overly focused on fighting inflation when in fact globalisation trends have changed the equation.
Other older voices, like the New York Times' Paul Krugman, share this view and have stepped up their attacks on the orthodox monetary policy accusing its supporters of being an "inflation cult" -- always predicting an apocalypse that never comes.
These arguments come with a hefty dose of politics of course, and accusing central bankers of not considering a wide range of scenarios seems either naive or cynical.
But as inflation statistics in the US and here remain stubbornly low there must now be a cause for some reassessment by those in control of the money supply -- including our Reserve Bank.
Loosening the focus on inflation is not something that should be done lightly.
I'm a generation younger than the baby boom bankers but am old enough to remember the late 1970s and early 1980s when inflation ripped a hole in people's wallets and they could feel themselves getting poorer by the day. And I'm not easily convinced the inflation risk is gone.
Like an old slasher-film monster it is prone to rear up just when you are breathing that sigh of relief and waiting for the credits to roll.
And once it gets away it is fiendishly difficult to get back under control.
The price stability of the New Zealand economy over the past decade has been a huge and often underappreciated asset to business even as complaints about the high dollar grab headlines.
With economic growth near capacity all the signs are there for inflationary pressure to be building here but it isn't. As BNZ head of research Stephen Toplis said last week: "New Zealand looks ripe for an inflation blowout but the global environment is, fortuitously, conspiring against this."
In that context is it time to shift the balance of our risk assessment? Is it possible that the damaging deflation that has plagued Japan for more than a decade is now the more dangerous bogey man?
Japan is desperate for some inflation in its economy to kick-start some growth.
High hopes are held for Prime Minister Shinzo Abe and his "three arrows" stimulatory policy. But Western commentators have already begun doubting his chances. Regardless of whether or not it is successful it should be apparent to the US and Europe that this is not something you want happening to your economy. As much as high inflation is a recipe for wealth destruction, deflation can embed poverty and create new inequalities as wages stagnate.
When you look at where the downward price pressure is in modern economies you can see it doesn't make it easy to fight poverty and inequality.
Wages don't rise and the things that keep getting cheaper -- junk food, chocolate, booze, giant TVs and other electronic trinkets -- aren't exactly good for us. Meanwhile, those things that keep rising regardless include housing, fruit and vegetables, electricity and higher education.
The spectre of deflation does loom larger now. We should be vigilant on both fronts and the trick for central banks will be to remain open to shifting policy track.
Regardless of the debate about where inflation is headed we need to pay attention to where it is. Right now it remains benign. On that basis it shouldn't be a surprise if the Reserve Bank pauses its rate rise plans for a while yet.
By Liam Dann of the New Zealand Herald
