While many economists chatter about inflation, others are now turning their heads toward another goblin -- deflation.

While inflation remains a long term concern, the more immediate,short term fear is deflation, economists say. "Of the two, deflation is a bigger concern," said Justin Yifu Lin, World Bank chief economist and vice-president, at a recent news conference.

Lin said current capacity utilization -- the extent to which nations are using their production capacity -- is in many large economies running at a lowly 50 percent to 60 percent, he said.

That is evidence that deflation could emerge in the near term, he said.

"When capacity is underutilized, deflation becomes a risk," Lin told reporters.

While inflation is more commonplace, deflation, when it occurs, can be like quicksand, sucking the economy in deeper and deeper. First, declining demand drive prices down. That impacts profits and leads to layoffs. Then unemployment further saps demand.

"And down you go in a vicious cycle," said Ben Carliner, director of research at the Economic Strategy Institute, a Washington, D.C. think tank.

Many economists say deflation could start to take hold once the economy rebounds.

Brian Fabbri, chief U.S. economist at BNP Paribas -- one of Europe's largest banks -- told reporters at the Reuters Investment Outlook Summit in New York on Tuesday that while the United States may soon emerge from the current recession, it will sink into deflation next year and slog through a period of sluggish growth that could linger for years.

Bill Beach, director of the center for data analysis at the Heritage Foundation, a Washington D.C. think tank, said that in this economy, consumers are wary of spending because of worries about layoffs or pay cuts.

Indeed, the U.S. savings rate has shot up from zero at the start of last year to a current 8 percent of personal income -- an unusual occurrence in a nation that typically spends more than it saves, he said.

"My guess is that (savings rates) will continue to climb as people become worried about the future and want to have more money in the bank," Beach said.

History has shown that deflation can be devastating.

Japan's economy was mired in a deflationary sandpit in the 1990s and took more than a decade to climb its way out, Beach noted.

Worried about the slow economy, the Japanese spent frugally. As a result, companies lowered their prices to entice consumers to buy products. That caused the Japanese to spend even less, putting off purchases for weeks or months in anticipation of further price cuts, he said.

Profits declined and companies could not afford to hire new workers, causing a rise in unemployment and leading to yet further declines in spending, he said.

Governments typically battle deflation by lowering interest rates, but once they reach zero, they can not be lowered any further, leaving policy makers at a loss, experts said.

While governments and central banks use a certain set of tools to curb inflation, Fabbri told Reuters TV that policymakers -- from the Great Depression to Japan's "lost decade" in the 1990s --have had difficulty finding solutions to deal with deflation.

Beach said the United States could see near term deflation in non-essential products purchased by the middle and upper middle class, such as high-end clothing and luxury cars.

While deflation could hurt such industries, it could harshly impact developing nations, as many depend on just a handful of export products to provide employment, grow their economies and rake in foreign currency. Many workers could find themselves unemployed, Beach said.

Iraq's economy, for example, pulls in 80 percent of its foreign currency from oil and 20 percent from rugs, Beach noted.

China's surging growth, however, may offset this, as the country is buying massive amounts of raw materials from developing nations in a bid to spur domestic demand, experts said.

Carliner said serious global deflation would look like the Great Depression -- with entire industries folding and whole nations going bankrupt -- although he does not foresee it getting that bad.

Luckily, demographics will prevent such gloom and doom scenarios.

Beach said developing nations in Asia and Africa are seeing surging population growth, which means that more people are buying food. That keeps demand up and creates jobs producing, transporting and selling rice and other such products. Nations in regions such as Asia and Africa, where population is on the rise, grow even in the worst of economic times, Beach said.

Still, that will not prevent some degree of economic pain in such countries, as prices lower and demand lags in the United States, said Barry Bosworth, former presidential advisor and senior fellow at the Brookings Institution.

He predicts that the current U.S. recession will be long lasting and that emerging economies could feel the sting.

Indeed, Carliner said, "U.S. consumers are tapped out -- they have too much debt and they're not spending anymore."

That makes deflation not only a threat in the United States but also globally, he said.

"Deflation is the immediate threat the world over," he said.

That is why G-20 nations are trying to coordinate stimulus spending -- to boost demand and prices so the world can get back on track to solid economic growth again, he said.

Some economists also believe Japan is once again experiencing deflation, which could affect its developing world trading partners.

Meanwhile, Carliner said a key question is whether the global economy will rebalance -- it can no longer rely on U.S. and European consumers to keep borrowing more money to buy more consumer goods from export nations, he said.

(Xinhua News Agency June 19, 2009)