How big is the risk of global deflation? Five years ago, central banks led by the US Federal Reserve fretted and cut short-term interest rates aggressively. This time the Fed is largely alone in seeking insurance against the possibility of a deflationary depression. Both the European Central Bank and the Bank of England may ease further. But neither is inclined to follow the Fed into “whatever it takes” territory.

Deflation is the ultimate economic calamity – because of the human and financial misery it brings and the constraints it puts on policy. We fear deflation because of its self-reinforcing effects. If people expect prices to fall tomorrow, they hold back on consumption today. If investors expect falling returns, they hoard cash. This is also known as the liquidity trap.