THE global economy may be close to a "tipping point" that could see it enter a slowdown so severe that it transforms the current period of rising inflation into a period of falling prices, the Bank for International Settlements said today.
In its annual report, the central bank for central banks said the impact of rising food and energy prices on real disposable incomes, combined with the reduced ability of financial institutions to make loans and high household debt levels may lead to a slowdown in global growth that "could prove to be much greater and longer-lasting than would be required to keep inflation under control."
"Over time, this could potentially even lead to deflation," it said.
"The risk is that headline inflation will rise significantly more in the coming months as food and energy prices remain elevated, some second-round effects on wages materialise and unsustainable subsidies in emerging market countries are reduced," Mr Knight said.
The BIS said the US economy is most at risk from problems in the financial system. But it added that there are "suspicions that a number of other countries with low household savings rates might be similarly, if less significantly, affected."
And it warned that while the US dollar's depreciation against other major currencies has so far been "remarkably orderly," that might not continue to be the case. "Foreign investors in US dollar assets have seen big losses," it said. "While unlikely...a sudden rush for the exits cannot be ruled out completely."
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