Will rampant inflation return as governments worldwide spend like never before?

Will deflation set in as demand from consumers and industry falls; causing a spiral of decreasing prices as consumers holding back on spending because tomorrow the goods will be even cheaper?

Or will we return to the 70’s stagflation with high inflation but combined with high unemployment and low growth?

Just a year ago we thought that the central banks now had inflation under control and had the knowledge, tools and freedom to keep it that way.

But then came the credit crisis that turned into an economic crisis and changed all that.

First with fear of deflation, now with fear of inflation returning due to increased government spending that is financed through borrowing and printing of money.

The inflation could even be combined with low growth and high employment creating stagflation. There has probably never been a more challenging time for the central banks steering the economy securely between the rocks of inflation and stagflation.

But what would be the best strategy?

The problem with the economy is that it is difficult to experiment on. If you make the wrong decision you cannot just repeat the experiment with another set of parameters.

I don’t know where this will end, but I am worried as to whether the world’s central banks will get it right. I think we will see a stretch of either increased inflation or deflation, but I just don’t know which one it will be.

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