Forget about inflation as a problem. Central banks have not been able to create any in developed countries. Forget about deflation, it seems we can control the downward extreme through driving real rates to negative levels. The big fear is LOWFLATION. This is the new word that seems to be coming out of the IMF. See its recent blog post. Lowflation is that in between area of under 1 percent inflation and but still positive. With lowflation you get low level pain. In fact, you get the same problems as deflation but at a lower level which is likely to last longer.
The problems with lowflation are two fold. In the rates market, low inflation means that with a zero bound you cannot get strong negative real rates. The negative real rates are used to jump start investments. A lowflation will also mean that real wages will stay the same which has a negative impact on employemtn growth. Nominal wages are sticky so inflation in needed to push down real wages. In the case of Europe, you cannot get the periphery countries in the EU to see greater employment growth without local inflation and falling real wages.
It is just another sign that the current policy mix is not working. Central banks have to try something else.
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