Inflation, pshaw! The real worry is deflation, says global economist


The economy is recovering, consumer confidence is rebounding and Obama just snagged the Nobel Peace Prize. Good times. Not so fast, says Nomura Securities International global chief economist Paul Sheard. U.S. and European economies are still quite "vulnerable," he warns. His big worry is something that few economists these days are talking about: the risk of outright deflation. Deflation, of course, occurs when the inflation rate goes negative, making it harder for central banks to stabilize an economy, because as Sheard explains, it's harder to start a fire then to tamp one down.

"Deflation is a bigger risk than inflation because it's much harder to get an economy out of deflation than inflation," Sheard said in an interview with DailyFinance. "You can have a burst of inflation and the central bank can always squeeze inflation out of the system. Deflation is different because deflation becomes entrenched."