IMF sees higer deflation risk

The risk of a destabilizing bout of deflation has grown as the United States and other countries struggle with weak economic recoveries and lingering financial problems.

That assessment, contained in a new International Monetary Fund report released Wednesday, comes as the Federal Reserve gears up to pump more money into the U.S. economy to strengthen the recovery and prevent any deflationary forces from taking hold. Japan flooded its stagnant economy with money Tuesday in a bid to fight deflation.

Deflation is a widespread drop in prices of goods and services, in the value of homes and stocks, and in wages. It crimps spending by people and businesses and makes it harder for them to pay down debts. All that hurts the economy.

“Deflation risks have recently risen again to a high level, although they remain below the peaks reached one year ago,” the IMF said.

Central banks like the Fed “should be the first line of defense” in combating deflation, the IMF said.

The Fed, the Bank of Japan and central banks in other countries have sliced key interest rates close to zero. Unable to cut rates further, the Fed is weighing buying more government bonds to bolster the economy. Such an effort, called quantitative easing, is aimed at driving down rates on mortgages and other loans to spur buying. Japan made a similar move on Tuesday.

The IMF plays a lead role in looking out for potential problems that can endanger the global economy and to help countries when they are battling economic and financial crises. The IMF and the World Bank hold meetings this weekend, where finance officials from the United States and other countries will report on how their economies are recovering from the worst global recession since the 1930s.

Financial problems remain the “Achilles’ heel” of recoveries in the United States and Europe, the fund said. Small and medium-sized banks in the United States, for example, are still coping with problem commercial real-estate loans, the IMF said. That is hurting the flow of loans to small businesses and hobbling employment, another restraint on the recovery.
Source: AP