“Now though all I hear about is the danger of an outbreak of high inflation. So I am going to put my cards on the table right away. I think the predominant risk is that inflation will be too low not too high over the next several years. I take 2 percent as a reasonable benchmark for the rate of inflation that’s most compatible with the Fed’s dual mandate of price stability and maximum employment.

And that’s also the figure that a majority of FOMC members cited as their long-run forecast for inflation according to the minutes of the committee’s April meeting. First of all, this very weak economy, if anything, is putting downward pressure on wages and prices. We’ve already seen a noticeable slowdown in wage growth and reports of wage cuts have become increasingly prevalent, that’s the sign of the sacrifices that some workers are making to keep their employers afloat and preserve their jobs.

Businesses are also cutting prices and profit margins to boost sales. Core inflation, which is the measure that excludes volatile food and energy prices, has drifted down below two percent. With unemployment already substantial and likely to rise further, the downward pressure on wages and prices should continue and couldn't intensify.

So for these reasons I expect core inflation will dip to about a percent over the next year and remain below two percent for several years. If the economy fails to recover soon, it is conceivable that this very low inflation could turn into outright deflation.

Worse still, it's conceivable that if deflation were to intensify, we could find ourselves in the devastating spiral in which prices fall in an ever faster pace and economic activity sinks more and more. It's conceivable, but I don't view this as likely.

The vigorous policy actions of the Fed and other central banks, combined with sizable fiscal stimulus here and abroad, have sent a clear message that deflation won't be tolerated.”