SINGAPORE (July 28): The years 2002 to 2016 saw unusual shocks and stresses. In the early 2000s, liquidity growth was excessive as the US central bank responded to the bursting of the tech bubble by aggressively cutting interest rates — and then taking its time to raise them again.

That period also saw China’s economy soar, partly as a result of high credit growth. All this caused global growth to accelerate, but the acceleration was accompanied by financial imbalances that finally ended in the mother of all crises in 2007.

Simply by virtue of the immense damage that the global financial crisis caused, it took a long time for the world economy to recover. Worse still, that recovery itself was delayed and distorted by multiple events: The eurozone had several rounds of sovereign debt crises, and the collapse in oil and commodity prices that followed added to the difficulties.

And, just as we were getting over those challenges, China managed to create several shocks for financial markets. If all that were not enough, we now have a range of geopolitical stresses as well.

In this unusual period of extreme stresses, the global economy was not able to settle down to any kind of “new norm”. However, the good news is the global economy is now, finally, finding its feet.

However, inflation, or more precisely the lack of it, has become a major point of contention for monetary policymakers and those seeking to under stand where asset markets are heading. In general, this year has seen lower-than-expected inflation in developed economies.

As a result, central banks in the US and Europe face a conundrum: Their economies have recovered from the ravages of the global financial crisis and subsequent aftershocks, such as the eurozone sovereign debt crises, but inflation data is not signalling a need to raise interest rates.

In the US particularly, where unemployment is low and average growth has been in line with the economy’s potential, there is little reason for the ultra-low policy rates and quantitative easing that were appropriate for a time of extreme crisis.

In other words, central banks really should be raising interest rates and reducing the size of their balance sheets. But, the absence of inflationary pressures has deterred them because some policymakers fear the low inflation could reflect underlying weaknesses in the economy and financial system.

Consequently, it has become important to understand what is happening to inflation. Is low inflation really a danger and will it persist? Is this phenomenon shaped by forces that are benign or potentially damaging?

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