For as long as most of us can remember, inflation has been the nemesis of central banks and economic policy makers everywhere. But ever since US Federal Reserve chief, Alan Greenspan, raised the spectre of deflation in a policy meeting last September, attention has shifted to the other end of the spectrum.

Usually associated with Japan, deflation can become a downward spiral of falling consumer demand, falling prices, declining production and falling demand. As prices fall, unemployment rises, the real cost of debt becomes relatively higher and bankruptcies increase. The expectation that prices will continue to fall prevents buying and interest rate cuts do little to...