LONDON (Reuters) - For all the talk of higher interest rates and monetary policy being "normalized" nearly a decade after the global credit crisis, the case for central banks staying easy is building.
In emerging markets, real -- or inflation-adjusted -- interest rates are at a three-year peak and the highest relative to developed market rates since the crisis. In developed economies, wage growth remains stubbornly and somewhat puzzlingly weak.
Bluntly put, inflation is low and there's little sign of it rising. If anything, inflationary pressures are pointing to the downside.
Global inflation so far this year is running at an annual rate of 2.5 percent, according to economists at Citi. That's higher than last year's 2.3 percent, but down from 2.6 percent in 2013 and 2.8 percent the year before that.
Crucially, it is on course to undershoot forecasts -- Citi had predicted 2017 inflation of 2.8 percent -- for a sixth year in a row.
This presents a headache for policymakers, who are keen to start dismantling post-crisis stimulus measures but wary of acting while price pressures remain weak.
There are strong arguments for central banks raising rates and reducing their balance sheets. Growth worldwide is the strongest in six years, asset bubbles appear to be forming across many markets, and global debt has never been higher.
But rightly or wrongly, orthodox central bank policy is aimed at keeping inflation around a pre-determined target, usually 2 percent. By that yardstick, most developed market central banks are failing to fulfil their mandates.
"It's a bit of a mystery. The Fed doesn't really understand it," New York University professor Lawrence White told CNBC this week, referring to the lack of wage growth that has helped keep U.S. inflation below the Federal Reserve's 2 percent target for 62 months in a row.
There are several possible reasons for this, including weaker collective bargaining power and trade unions or reluctance among workers to demand higher pay for fear of losing their job. Highly skilled and paid jobs lost after 2008 may have been replaced by lower-skilled and paid jobs, and there may be greater slack in labour markets than headline figures suggest.
The trend towards short-term contracts and temporary work in the digital age, the so-called gig economy, is also surpressing wage growth.
The "Phillips curve" theory that falling unemployment and rising employment leads to higher wages and inflation is not working in the post-crisis industrialised world, a new reality that investors are having to grapple with.
All of that goes a long way towards explaining why bond yields are struggling to rise much, yield curves have flattened this year and investors, frankly, don't believe monetary policy will be tightened much at all.
The Fed has raised rates four times since December 2015 and is likely to do so again, although nowhere near as aggressively as it originally planned. The Fed also plans to start shrinking its $4.24 trillion bond portfolio later this year, but again it will be a gradual process.
The Bank of Japan recently pushed back the date it expects to reach its 2 percent inflation target for the sixth time since 2013, and any unwinding of the European Central Bank's huge balance sheet will be glacial.
Record debt levels, particularly in the emerging markets, may argue against easier monetary policy and suggest that central banks should in fact be raising rates. Lower interest rates could stoke concerns about capital being pulled out of emerging economies.
But in a world of structurally lower growth, excess global savings and more dispersed risk, investors face a shortage of safe-haven destinations and high-yielding assets. Emerging market bonds could meet both criteria, says Oxford Economics.
As Kenneth Broux at Societe Generale notes, emerging markets now make up close to 50 percent of world GDP. The euro zone and United States are unlikely to escape the disinflationary tailwinds.
The latest global debt figures from the Institute of International Finance (IIF) show how risky higher interest rates might be for emerging markets.
Global debt rose to a record $217 trillion this year, even as borrowing in developed markets slowed. Borrowing in emerging markets rose $3 trillion to $56 trillion, and $1.9 trillion of EM bonds and syndicated loans come due by the end of next year.
"Rollover risk is high," the IIF said.
The opinions expressed here are those of the author, a columnist for Reuters
Reporting by Jamie McGeever; Editing by Catherine Evans