[The Fountain] It is not over until it’s over

It is too early to conclude whether the one standing on top of the hill far away is a dog (disinflation), or a wolf (inflation) or an even more frightening tiger (deflation).

CHO HYUN-SOOKThe author is a business news reporter of the JoongAng Ilbo. One magic word pulled up the Nasdaq by 2 percent at once on Feb. 1: “disinflation.” After the meeting to decide the benchmark rate, U.S. Fed Chairman Jerome Powell mentioned the word 15 times during a 45-min news conference. He also used modifiers such as “most welcome,” “good” and “great.”

Instead of inflation or deflation, what really made the Fed chair so excited? Disinflation sounds similar to deflation, but it has a different meaning. Disinflation refers to rising prices with a gradual decrease in the margin. For instance, if the consumer price rate increase falls to 4 percent and 3 percent from 5 percent last year, it is disinflation. But if the inflation rate continues to drop by 1 percent or 2 percent, that’s deflation. Unlike disinflation, deflation is a sign of serious economic crisis in which wages and prices simultaneously fall.

In the United States, the late 1980s and 2000s were periods of disinflation after Fed Chair Paul Volcker declared a victory against the “war against inflation.” Volker’s extreme diagnosis of pulling up the policy rate to 20 percent helped stabilize prices. Since then, the Fed could implement monetary policy with composure, and the U.S. economy could enjoy the golden age.

The rate of consumer price increase in the U.S. spiked to 9.1 percent in June and fell to 6.5 percent in December. It is still high, but the pace of increase has slowed. It is natural that Powell was excited over the sign of disinflation. That’s a signal that the Fed chair is winning the war on inflation. The market raved over the anticipation that the rate hikes are nearing an end.

But it is too early to be relieved. There are countless examples of making the wrong choice in the face of disinflation. Former Fed Chair Arthur Burns, who served from 1970 to 1978, lowered the interest rate as the consumer price index slowed down. But the decision was met by a backlash of ultra-high prices. Bank of Japan head Yasushi Mieno, who served between 1989 and 1994, raised the policy rate over the top to burst the bubble and it brought about the “lost 20 years.”

It is too early to conclude whether the one standing on top of the hill far away is a dog (disinflation), or a wolf (inflation) or an even more frightening tiger (deflation). It is not over until it’s over.