Will deflation be the next stage of the crisis?

The IMF’s Managing Director, Christine Lagarde, recently suggested that deflation is still a major risk for the world economy. Since her speech, there has been a sharp drop in equity prices, particularly in emerging markets, commodity prices have begun to fall and there is growing evidence of a slowdown in growth in China and possibly the US. If these trends persist, deflationary forces will rise. For now, we still think there is little chance of a period of broadbased global deflation. But Japan may relapse into deflation and the euro-zone is at risk of a damaging period of very low or negative inflation.