Global Inflation and a Potential Currency War

Recent financial figures have shown that several countries around the globe have experienced some of their lowest inflation rates in years. Normally this would be the goal of the nations' central banks, but in the economic states of these regions, this low inflation could be the source of several problems. Now the issue facing many of the world's richest nations is to avoid extremely low inflation and to try and raise prices. The proposed processes to achieve these goals have the potential to lead to some intense competition.

The inflation rates in some of the world's richest nations have been suffering over the past year. These levels of low inflation lead to several problems: debts become harder to pay off, prices and wages fall which leads to less buying, and the risk of deflation becomes imminent. Japan, suffering from more than a decade of deflation, has seen its economy grow steadily, but its core inflation rate is staying at 0%. The United Kingdom, which has had one of the highest rates of inflation in Europe for many years, has recently seen its rates drop by 0.5%. One of the more drastic examples of inflationary troubles, however, has been seen in the Eurozone. In October, its inflation rate was measured to be 0.7%, a drop from the 1.1% rate measured in September. This is a major area of concern for the region, which has just eked out of recession but is still suffering from a crushing debt and its highest employment rate ever. In response, the boss of the European Central Bank, Mario Draghi, has lowered the benchmark interest rate to 0.25%, the lowest it has ever been.

While this move has been lauded by European nations, it is unclear how much of a real economic impact it will have. Already, three countries—Greece, Ireland, and Cyprus—have entered stages of deflation, so more measures will have to be taken if the rest of the region wishes to avoid deflation and a fall back into recession. The United States has also seen its inflation decrease to a tiny 1.2%. However, the situation here is not as bleak as the Eurozone's. The Federal Reserve has been using quantitative easing to its advantage, purchasing $85 billion worth of assets per month. The U.S. is also taking a look at reducing their rate of unemployment by monitoring interest rates; this would keep their interest rates lower for longer and provide a safe base until inflation and unemployment problems can be solved.

These nations are now attempting several methods to find their way out of the slumps of extremely low inflation. Japan has raised its inflation target and has caused a 20% drop in the yen, coming at a potential cost to other Asian countries. The United Kingdom has been adopting similar measures with the pound. The Eurozone countries do not have the option of pursuing the same devaluation methods due to their common currency, and are instead using internal devaluations and attempting increased exports to bring a competitive advantage to their economies. However, the export method will not work unless only a select few countries pursue this method, or the exports are balanced with higher domestic consumption, both unlikely scenarios in the current economic state. The United State's quantitative easing has also had major international effects, majorly reducing the rates of currencies of emerging economies such as Brazil and India.

From all of this, it is clear that in these countries and in several others, the main goal is to devalue currencies as best as possible and increase inflation. It also appears that the devaluations of currencies are reaching increasingly competitive methods and are impacting other nations greatly, which, despite opposing statements from the IMF and from the G20, could potentially mean that there is an ongoing currency war. Do you think that this is the case? How can these countries solve their currency issues?