Investment Line: eight reasons why deflation is a slow burning threat

Fiscal austerity

Williams says while the severity and the timing of the fiscal squeezes will vary from country to country, the long-term impact of the measures is likely to be severe.

He says: 'But in the long run, the severity of the fiscal squeeze on household incomes will mean that deflation, not high inflation, will be the greater risk. Indeed, it is possible that the most severe tightenings push economies into deflation, thereby making their fiscal consolidations even harder to achieve. Japan’s recent troubles with its public finances provide a case in point.'