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Shifting global inflation dynamicsAs highlighted in the World Economic Situation and Prospects (WESP) 2017 report released in January, the trend of extremely low inflation rates has been a persistent concern for policymakers, particularly in developed economies and parts of Asia.A prolonged period of extremely low inflation can have significant adverse effects on economic activity. One of them is the increased risk of a debt-deflation spiral: As debt is fixed nominally, very low inflation or deflation increases the real burden of the debt for borrowers. In other words, as prices decline, revenues decline but debt service remains unchanged. As a result, Governments and firms have to spend an increasing share of their revenues on servicing their existing debt obligations, forcing them to reduce spending on goods and services. Collectively, this will dampen overall demand in an economy, in turn intensifying deflationary pressures.
