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To: UnBelievable who wrote (241189)	5/18/2003 7:13:43 PM
From: ild	Respond to of 436258

IMF Task Force Warns of Risk For Deflation in Some Countries By DAVID WESSEL Staff Reporter of THE WALL STREET JOURNAL WASHINGTON -- A special International Monetary Fund deflation task force warned of a high and increasing risk of deflation in Germany, Taiwan and Hong Kong and of worsening deflation in Japan, but concluded that the risks of global deflation remain "still low." "In the U.S., despite the lingering effects of the equity price bubble," the IMF said in a report released Sunday, "risk of deflation appears relatively low … but not minimal." Serious deflation is unlikely unless unemployment (now 6%) reaches 8% or economic growth remains below 1% over the next eighteen months, it said. "Deflation is seldom benign," the IMF economists warned in a bluntly-worded manifesto aimed at prodding governments and central banks into preparing for the worst. "Deflation can be costly, and is difficult to anticipate." One or two quarters of falling prices wouldn't be worrisome, it said; more than that would be. "Even mild but continuous deflation can be cause for concern." "Policies can be effective in warding off deflation, but only if preemptive, forceful and sometimes unconventional steps are taken," the task force said. "It is better to prevent deflation than to try to cure it, and monetary policy must take the lead." Examining 35 economies that comprise 90% of the global economy, the IMF described the risk of significant deflation as "moderate" in Singapore and seven small European economies. It rated the deflation risk "low" in 16 countries, including the U.S. and China, and "minimal" in eight others. The task force called particular attention to Germany, where underlying inflation is below 1% already, unemployment and unused capacity are high and rising and banks are struggling. "The probability of mild deflation taking hold over the next year is considerable," the IMF said. Yet German fiscal policy is turning contractionary as the government tries to keep its budget deficit below ceilings set by treaty in Europe. And because deflation risks are lower elsewhere among countries that share the euro, the European Central Bank has been slow to cut interest rates. The IMF blamed falling prices in China on transitory factors, as well as its large pool of underutilized workers and excess capacity. The government's antideflation fiscal and monetary policies and "buoyant private demand and increasing real-estate prices" diminish the deflation threat, the IMF said. But it added that SARS could have an adverse -- and deflationary -- effect if not contained quickly. "Growing exports from China have added to price pressures in many sectors world-wide and these pressures are set to increase," the IMF added. This is particularly evident in Taiwan and Hong Kong and, to a lesser extent, Singapore. The task force said it "didn't find evidence to support strong concerns of generalized global deflation." Although deflation spread from one country to another via the gold standard in the late 1920s and 1930s, it argued that exporting deflation is less likely today, partly because exchange rates are flexible. The IMF task force, convened by chief economist Kenneth Rogoff in December, was headed by Manmohan S. Kuman of the IMF's research department. The IMF said it sees "only marginal signs of deflationary pressures waning" in Japan, and repeated previous calls for "more vigorous" monetary policy there. The task force praised the "remarkable flexibility" of the U.S. Federal Reserve, and said the falling dollar lessens the likelihood of deflation in the U.S. Over the past three years, 16% of industrial countries and 26% of large emerging-market economies have seen periods in which measured inflation fell below 1%, which the IMF termed "virtual deflation" because government price indexes tend to overstate the pace of price increases.