Ever since the oil shock of the early 1970s, central bankershave fretted that rising energy prices spelled recession.

Now they're discovering cheaper energy can be a headache too,especially when warding off deflation is the economic challenge dujour.

Historically, the 27 percent drop in Brent crude from its Junepeak to its lowest in four years would have been a reason forhappiness among policy makers. It makes it cheaper for companies tochurn out everything from cars to toys and for consumers to filltheir tanks, spurring demand.

A study published in August by the Federal Reserve calculatedthat rising oil prices explained a 5 percent reduction in the sizeof the U.S. economy during the recent financial crisis.

So what could be wrong now? More than almost ever, central banksare as worried about low inflation as weak growth. What they'reworking against is a deflationary spiral that will drive up debtburdens and derail demand as businesses and households retrench inanticipation of even lower prices.

Just yesterday, the U.K. reported the slowest inflation in fiveyears and prices actually fell in Sweden for a second month. Theeuro area will say tomorrow that its rate is also the weakest since2009.

A survey of fund managers by Bank of America Corp. yesterdayreported that global inflation expectations are at two-year lowsand only a net 18 percent of fund managers view monetary policy astoo stimulative, down 14 percentage points from last month and theweakest since August 2012.

Bank of America economist Gustavo Reis calculates that a 20percent drop in the oil price would shave 0.5 percentage points offglobal inflation in the next year, pushing the rate back toward the1.7 percent it reached in 2009, from 2.2 percent.

A persistent decline in energy and agriculture costs “would puta significant downward pressure on headline inflation,” NewYork-based Reis wrote in an Oct. 10 report.

European Central Bank (ECB) President Mario Draghi hasparticular reason to be anxious. He already blames energy and foodprices for a “large extent” of the slowing in euro-area inflationto its weakest in almost five years.

Fed Chair Janet Yellen will be less concerned, since she doesn'tface a deflation risk. What's more, Deutsche Bank AG economistJoseph LaVorgna estimated yesterday that if the recent decline inenergy costs is maintained, consumer cash flow would improve by $40billion.

At the same time, the U.S. is now the world's biggest oilproducer and is again a net exporter.

“Cheaper oil is a good thing for the U.S. economy overall, butmay be a reason the Fed errs on the side of keeping rates low orraising them more slowly,” said Andrew Kenningham, an economist atCapital Economics Ltd. in London.

The Bank of Japan is sounding more upbeat. “Japan importsmassive amounts of oil, so falling oil prices itself is a plus forthe economy,” Bank of Japan Governor Haruhiko Kuroda said inWashington last week.

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