Bernanke is not very concerned about deflation. “We obviously want to avoid deflation,” he testified, but “we think deflation is at this point probably a pretty low-probability risk.” Formal estimates of the probability of deflation over the next five years, produced by the Atlanta Fed, agree in broad terms: lately the probability has risen to close to 17%, but it is still noticeably less than the 30% that preceded QE2 in August and September 2010. Inflation expectations have started to ease slightly of late as well. So the inflation picture, too, is slowly evolving to support more easing.

Chart : Deflation risks inch higher (in %) 

Source: BofA ML

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