Living with deflation

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).…