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Living with deflation

Deflation makes us anxious because it is something we have never experienced. But we should worry less

By Diane Coyle   July 2003

When one of the world’s best economists warns that the global economy is sinking into a quagmire of depression and deflation, we should listen. Paul Krugman, professor of economics at Princeton, has in fact been warning of this since 1998-long before the boom turned to bust. So far, he is looking prescient. Now many economists and central bank officials have joined him in seeing deflation-a sustained decline in price levels-as a serious danger.

Growth has slowed to a standstill in most regions, and inflation rates are below 2 per cent in the US and the euro area (but not Britain).…

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