On the surface, policy settings around the world look very inflationary, with large fiscal deficits and aggressively easy monetary policies. Yet it is hard to see inflation gaining any traction when global activity is so weak and the monetary transmission process is impaired in many countries.
Global traded goods prices are falling, wages are growing very slowly in the major economies and monetary growth is moderate. There is more of a deflationary than inflationary tone to the economic environment and it does not look as if this will change any time soon.
Central bankers have definitely softened their attitude to inflation and are prepared to take risks in the direction of higher prices to ensure a faster pace of growth. However, once economic growth does move on to sounder foundations, then policymakers attitudes will harden.
In other words, faster economic growth is a pre-condition for a sustained major inflation problem, but an improved economy will trigger a tightening in policy. It would be a mistake to think that the current generation of central bankers believes that sustained high inflation would be a desirable solution to current debt levels.
Bottom line: inflation will remain broadly benign in 2013.