Deflation risk

David Uren has an article talking about deflation as a global risk.

Both the chief economist of the OECD, Pier Carlo Padoan, and the managing director of the International Monetary Fund, Christine Lagarde, have described the possibility of prices starting to fall as one of the most serious threats to the global economic recovery.

“With inflation running below many central banks’ targets, we see rising risks of deflation, which could prove disastrous for the recovery. If inflation is the genie, then deflation is the ogre that must be fought decisively,” Ms Lagarde said.

Here are some figures I found for inflation – CPI and Current harmonised inflation. Eyeballing that data it appears that high-income economies do have very low rates of inflation.

Unfortunately Australia is not included in that list. The ABS put our latest inflation rate at 2.3% (sa). David Uren reports on the expected inflation rate (to be released on Wednesday):

The headline figure may be closer to 2.7 per cent, reflecting the influence of high fruit and vegetable prices and the influence of the fall in the dollar.

To be sure that remains within the RBA 2% – 3% target band, but it is well above the levels of many other high-income economies.

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68 Responses to Deflation risk

  1. Robert Crew

    If deflation stops consumers from spending now, due to the expectation of falling prices in future, then why does anybody ever buy, or upgrade, a computer? Why do companies invest in plant and equipment to produce lower-cost goods, when surely that price deflation must drive customers away?

  2. Token

    As I noted in the OT, the whole article is built upon this premise which seems to oversimplify why Japan suffered the deflation and then draw conclusions which do not follow:

    FALLING inflation rates across the advanced world are fanning fears that economic recovery may be undermined by deflation similar to that suffered by Japan for the past decade

  3. Andrew

    What Robert said. No one has ever answered that q.

    Where deflation does become an issue is pervasive property deflation – frightens the shit out of banks. But they will never admit that reflationary policy is just making people pay more so that banks are happier.

  4. Sinclair Davidson

    m0nty – inflation is high, unemployment is high. The economy is stagnant. What’s to revisit?

  5. Inflation of 2.3% to 2.7% is not high. Unemployment of 5.8% is not high. The economy is running at about historical trend growth, it is not stagnant.

    That 2011 article looks more and more wrongheaded in retrospect.

  6. Baldrick

    The most significant price rises (excluding holiday travel) this quarter were for:
    water and sewerage (+9.9%)
    property rates and charges (+7.9%)
    automotive fuel (+7.6%)
    electricity (+4.4%)
    The most significant offsetting price fall this quarter was for vegetables (-4.5%).

    Three of the top four were for government and government sponsored utilities.

  7. mundi

    I have always wondered by they believe the economy is driven by demand, but at the same time don’t like falling prices…

    Oh wait… they want demand at high prices, inexcess of what people can afford, as the currency expands only through the creation of debt.

    Can you imagine if people refused to go into debt? There would be deflation. People would be able to save without having to use a bank. Oh the horrors!

  8. Jim Rose

    we see rising risks of deflation, which could prove disastrous for the recovery.

    why?

    The only time where there was deflation and depression is the Great Depression in the USA.

    Deflation was more severe in the depression of 1920-1921, but the depression was short.

    see http://www.minneapolisfed.org/research/sr/sr331.pdf

    A broad historical look finds many more periods of deflation with reasonable growth than with depression and many more periods of depression with inflation than with deflation.

  9. jock

    A leftist MD of the IMF bemoaning that good old fashioned inflation will not dig European economies out of their muddle. She certainly has a two dimensional grasp of economics: who can I tax and when can I start.

  10. Sinclair Davidson

    Inflation of 2.3% to 2.7% is not high. Unemployment of 5.8% is not high.

    If you say so.

  11. RODNEY

    You should be flattered Sinclair that anybody remembers anything you wrote in 2011.

    Deflation is possible given the rate of technological change. It was pretty much the case in Victorian Britain for similar reasons. Not good for borrowers.

  12. Sinclair Davidson

    You should be flattered Sinclair that anybody remembers anything you wrote in 2011.

    I’m quite disturbed these people don’t have lives.

  13. Token
    Inflation of 2.3% to 2.7% is not high. Unemployment of 5.8% is not high.

    If you say so.

    Give M0nty a few minutes to realise he has endorsed the economic management of the Abbott government.

  14. If you say so.

    The RBA’s target is 2% to 3% as you say, and inflation of 2.3 to 2.7 is by definition right in the middle of that range! Unemployment has spent the majority of the past 30 years above 5.8%.

  15. Another stupid comment by Token. Abbott deserves no credit for the current state of the Australian economy. Rudd and Gillard steered us away from recession during the biggest global economic downturn since the 1930s depression.

  16. Jim Rose

    Monty, the leads and lags on policy mean abbott has had little effect as yet

  17. brc

    I was involved in an online debate of inflation vs deflation…ostensibly in the context of Bitcoin…but drifting off topic.

    Anyway, I don’t claim to know for sure if deflation is the ogre or not, but the hysteria which surrounds it makes me believe there is soemthing amiss. The way I see it, we all know currency increase/decrease creates winners and losers. Neither is ‘good’ or ‘bad’ inherently. Each person will see the good/bad depending on whether they are a net importer or exporter.

    Now. With deflation / inflation, we must have the same thing, right? A set of winners, and a set of losers. The hysteria must come from the losers. Are the losers the financial sector and the governments?

    Two things I note, the first having already been covered : why does anyone buy anything
    , when the price of most things fall over time? Second, while it is possible (and many examples abound) for prices to go to infinity with inflation, it’s not possible for prices to go to zero.

    The problem is obviously the stickiness of wages, but if people find that their hours can buy the same amount of stuff as before,surely that is not insurmountable? People seem to be able to move to other countries and suffer a numerical drop in income, but remain happy because their purchasing power is maintained? Ie, move to the UK and you get deflation in the numeric amount of your salary. But your salary has got buying power, so you adjust fine. It seems like a small issue compared to constantly having the purchasing power of your wage and savings eroded.

    Anyway, over to the learned..is deflation really as scary as it is made out? Isn’t the natural state of the world mild deflation, through increased productivity?

  18. Louis Hissink

    The biggest global economic downturn since the 1930s depression.

    And not a capitalistic system within sight to blame for it.

  19. Monty, the leads and lags on policy mean abbott has had little effect as yet

    Agreed.

  20. Sinclair Davidson

    I suppose if you set the benchmarks low enough any policy is a success.

  21. Token

    Abbott deserves no credit for the current state of the Australian economy

    LOL, so the Rudd & Gillard government are 100% responsible for the spike in unemployment.

    Gotcha M0nty.

  22. Percy

    is deflation really as scary as it is made out?

    For those that have borrowed to their limit, I’d say yes.

    But overall, a little deflation every now and then can help to correct markets that have gotten out of control.

  23. Rabz

    The headline figure may be closer to 2.7 per cent, reflecting the influence of high fruit and vegetable prices

    World’s greatest treasurer, Goose Swansteen, vindicated again, I tells ya!

    Seriously though, isn’t it time for a redesign of the basket of goods and services and the weightings used to determine the CPI?

  24. I suppose if you set the benchmarks low enough any policy is a success.

    The statistics you quote are all at historical trend levels or better. You call trend levels “high” and “stagnant”. You are the one setting unrealistic benchmarks, Sinclair.

  25. LOL, so the Rudd & Gillard government are 100% responsible for the spike in unemployment.

    The Holden closure hasn’t hit the statistics yet, Token.

  26. Yes Sinc, my whip hand is getting tired. ;)

  27. Sinclair Davidson

    :) I don’t think so. You got owned above. You get get owned most days.

  28. If anyone got owned it’s you, Sinclair, by the reality of the last two or three years since that silly stagflation article. You are trying valiantly to defend it by claiming that an inflation range which is precisely in the middle of the RBA’s target range is “high”, and an economy which is growing at historical trend rates is “stagnant”. You are wrong, plain and simple.

    If you are prepared to deny reality like this, I suppose, you’ll think anything.

  29. Sinclair Davidson

    You are wrong, plain and simple.

    If you say so.

  30. Peewhit

    Henry Thornton has the unofficial unemployment rate at 11.2%, and with underemloyment added it rises to about the 20% mark. I have a feeling that the economy showed little growth in the last six months. So where are we headed?

  31. brc

    It’d be great if the thread would get back on topic. I was hoping for some interesting replies and reading.

  32. Pyrmonter

    @ SD – I’d have expected you to rejoice – low interest rates driving deflation, to return the real interest rate to a more natural level …

  33. Sinclair Davidson

    Pyrmonter – what deflation?

  34. Andrew

    and an economy which is growing at historical trend rates is “stagnant”

    At the risk of feeding the Iunctarete molestia donuticus, when did trend employed persons last contract for 8 consecutive months? Presumably it’s waiting until Senior Labor Figures announce that enough time has expired since the R-G-R govt to flip the switch from “economic miracle” to “heading for Armageddon” before acknowledging the true state of the economy. I also cite Exhibit B, the GDP disaster.

  35. Sinclair Davidson

    I don’t know what’s happening in Israel – but I don’t think there can be deflation in Greece. Their currency remains the Euro.

  36. Pyrmonter

    congrats to JR for the Kehoe article – good reminder that Alan Kohler’s views (such as http://www.businessspectator.com.au/article/2014/1/20/economy/oh-no-oil-price-could-fall) make little sense; he really can be a business version of the ABC’s Michael Janda.

  37. According to your links, Sinclair:

    Greece’s annual CPI: -1.71%
    Greece’s annual current harmonised inflation: -1.82%

  38. Pyrmonter

    What has currency got to do with it? Before 1914, currency was in several major economies tied to a shiny yellow metal , yet that period experienced deflation and inflation.

  39. Squirrel

    It is difficult to see a sustained period of real (as opposed to measured by current ABS measures) deflation in Australia unless there is a radical deregulation of the labour market – hard to imagine under this or any likely future federal Government. Aside from periodic (weather-related etc.) changes in food prices, the only consistent falls (if any) that ever seem to occur in prices are for imported goods – i.e. goods which have a relatively limited Australian labour cost added to them before they reach the consumer. Baldrick’s comment at 10.52am about costs from government and government sponsored utilities is very pertinent here, but I equally have trouble thinking of any non-imported goods/services I purchase from the private sector which have fallen in price in recent years. About as (un)likely as radical labour market deregulation are deliberate measures to reduce appreciably – rather than, at best, constrain – increases in property prices. That would be the only other source I could see for real deflation in Australia.

  40. Andrew

    Rudd and Gillard steered us away from recession during the biggest global economic downturn since the 1930s depression.

    And again, for the sake of getting it on record, the GFC extended from Feb 9th (our time) 2007 with the collapse of funding to largest subprime lender New Century (and consequent plunge in the ABX index to levels that renders effectively all sub-prime CDOs worthless until mid Feb 2009 when credit markets recovered and stocks began their bull market.

    What “steering” did the Goose undertake during that period? With the US economy shrinking, he declared inflation the greatest moral hazard for our economy and announced an austerity Budget in May 2008. He was apparently oblivious to the failure of Bear Stearns and to the Fed’s announcement of stimulus to avoid deflation. He then pissed on the Opposition’s calls for deposit guarantees. To summarise his steering:
    - Yes to austerity
    - No to deposit guarantees.

    Then even the hapless Ken Henry decided it was time for Goose to go. He was sat in the naughty corner while the people with some economics training put the deposit guarantees in place after the rest of the world had them and while the Goose’s refusal to do the obvious caused a run on our banks. He then claimed credit for the idea.

    There was a trivially small stimulus, well under 1% of GDP. It did nothing.

    Then the GFC ended.

    What “steering” occurred duringthe GFC that I was unaware of?

    Some months later, with the GFC over, the Spain-Goose stimulus package marked the first ALP-specific economic policy implementation. (The LNP supported the amount of stimulus for 2009, but not the form, and not the proposal for the 2 out years.) How well did that go? Remind me what a great success it was again? Our unemployment is, like the EU’s, worse than it was when the GFC ended. How many countries / what % of the world’s population does this apply to? What % of those are net commodity exporters, during the greatest commodity boom of our lives?

  41. Pedro

    I think when people talk about the deflation ogre they are pretty clearly talking about more than the natural reduction in the real price of goods and services resulting from increased productivity. What I don’t get is why there is the fear. If Japan is the scary story then the cause of their problem isn’t lacking for diagnosis and explanation.

  42. Andrew

    Greece has negative CPI, presumably as domestic services fall in EUR terms (as the unemployed people offer their services at lower cost after the catastrophic stimulus experiment caused Great Depression in the Eurozone). Greece is the last economy left in falling CPI – the PIIS have returned to marginal positive CPI as has non-EUR Europe.

  43. Pedro

    “I don’t think there can be deflation in Greece. Their currency remains the Euro.”

    Isn’t deflation an increase in the value of money relative to goods. I should have thought that was very possible within Greece given they are stuck with the Euro.

  44. Sinclair Davidson

    Deflation is a monetary problem caused by an increase in the value of money and manifesting itself in a sustained decrease in the price level. Now I’m happy to believe that the Greek economy is in decline and the value of its goods and services shrinking – but this isn’t due to an increase in the value of the currency.

  45. Pyrmonter

    So inflation is nominal output growth? Not how most people think of it.

  46. Sinclair Davidson

    No. Inflation is a decrease in the purchasing power of money manifesting itself in a general increase in the price level.

  47. Sinclair Davidson

    The confusion arises because people have began to define the problem by its symptoms and not the cause. Increasing or decreasing prices are not problematic in and of themselves if they are caused by changes in relative prices (due, for example, to increases in technology/productivity or shortages etc).

  48. Percy

    So, for the terms inflation or deflation to apply Sinc, it must be due to a change in the currency value, regardless of what’s happening with the price of goods and services?

    That’s a genuine question, not a rebuttle.

  49. Percy

    Huh, nevermind. You basically answered before I posted

  50. Jim Rose

    What is the welfare cost of perfectly anticipated deflation?

  51. Pyrmonter

    @ Jim Rose – interaction with the nominal thresholds in the tax system? Increased price variance overall? I’ve never quite understood some “commentators” (Kohler being an example)’ obsession with opposition to slight reductions in the price level; it was a fairly common experience pre 1945, and is something that should be borne in mind in considering pre-war “inflation”. It was also the “economic” interpretation of Menzies’ ’49 campaign platform of “putting value back into the pound”. Like most governments, he defaulted.

  52. Pedro

    “Deflation is a monetary problem caused by an increase in the value of money and manifesting itself in a sustained decrease in the price level. Now I’m happy to believe that the Greek economy is in decline and the value of its goods and services shrinking – but this isn’t due to an increase in the value of the currency.”

    Well, the increase in the value of the Euro measured against greek goods and services is caused by a decline on the supply-side of the goods and services.

    However, there are really two questions:

    1 Is deflation an ogre if it exists.

    2 Is there are reason to be worried about deflation occuring at ogre-levels.

    You can’t believe in supply and demand and not think that deflation could be an economic problem. But the existence of that problem is a result of central bank choices.

  53. From the Daily Murdoch.

    Some economists are expecting the Reserve Bank of Australia to raise interest rates in 2014, from a record low 2.5 per cent, as a weaker Australian dollar adds to inflationary pressures.

    Gratuitous Mises quote
    “He pointed out that if a man is run over by a car and seriously hurt, you do not make his condition better by putting the car in reverse and running over him again.”

    I think this was in the context of Governments interfering again which was much the case in Japan.

  54. Jim Rose

    In the early 1980s, Tom Sargent wrote two essays on stopping hyperinflations in the 1920s and stopping moderate inflations such as under Thatcher and in France in 1926.

    Both essays showed that high inflation could be stopped quickly with few adverse employment effects if there was a credible fiscal consolidation as well. Rapid deflation is possible with few adverse effects.

    Here is a nice lecture by him on the crisis in Euroland at http://www.youtube.com/playlist?list=PLbdYmEXIEvkqw6qOIbUiWQ-JaiN8jIYGE

  55. banz

    Oh Monty

    http://loadeddogma.blogspot.com.au/search?updated-max=2013-11-27T00:13:00%2B11:00&max-results=7

    Did you want to revisit that article?

    Oh Noes, is it possible you made a mistake? Perhaps you were busy twittering that day? Not that you cared who won the election, right?

    You really are a fat fucking ignorant cunt, if you managed to remove shortens cock from your mouth for a couple of minutes perhaps you could get some fresh air and smell the roses.

    Corky? Member that show? Just to help you out – https://www.google.com.au/search?q=corky&client=firefox-a&hs=Xq&rls=org.mozilla:en-US:official&tbm=isch&tbo=u&source=univ&sa=X&ei=As_cUu6AM4W7lAXPjYGQCw&ved=0CD0QsAQ&biw=1366&bih=662

    I had a listen to you speak one day, you stumbling mumbling farkin halfwit..yibbba yibbaa, you manage to turn what should be a simple sentence comment into 5 minutes of farkin agony, actually, for the sake of us all stick to twitter.

  56. banz

    Oh Monty

    http://loadeddogma.blogspot.com.au/search?updated-max=2013-11-27T00:13:00%2B11:00&max-results=7

    Did you want to revisit that article?

    Oh Noes, is it possible you made a mistake? Perhaps you were busy twittering that day? Not that you cared who won the election, right?

    You really are a fat little cunnie, if you managed to remove shortens pecker from your mouth for a couple of minutes perhaps you could get some fresh air and smell the roses.

    You ever see the show corky Monty?

    I had a listen to you speak one day, you stumbling mumbling halfwit..yibbba yibbaa, you manage to turn what should be a simple sentence comment into 5 minutes of agony, actually, for the sake of us all stick to twitter.

  57. .

    Sinclair Davidson
    #1159634, posted on January 20, 2014 at 1:48 pm

    The confusion arises because people have began to define the problem by its symptoms and not the cause. Increasing or decreasing prices are not problematic in and of themselves if they are caused by changes in relative prices (due, for example, to increases in technology/productivity or shortages etc).

    Liberty quote yourself.

  58. You’re not making much sense, banz. Check your meds.

  59. Pyrmonter

    Taking the more conventional definition of deflation as a fall in the general price level, is there an example since 1930 of deflation restoring (or coming close to restoring) full employment? Sargent’s piece deals with disinflation, not deflation so defined; the only example that springs to mind is the Premiers Plan, the rather peculiar simultaneous adjustment of loans, rents, wages and prices.

  60. A H

    Full employment is always possible, simply by lowering wages.

    Deflation is good for the average citizen. Wages fall, but prices fall too… buying power doesn’t change to much. It’s good for people with savings, people who spend less than they earn.

    It’s bad for lenders, and it’s bad for borrowers…. it’s bad for governments.

    But people who create value, rather than leech off others, can thrive in deflation.

    Rapid deflation or inflation is bad because it makes prices unpredictable and that makes doing business more difficult.

  61. banz

    “You’re not making much sense, banz. Check your meds.”

    Corky you should update that blog post dont you think :)

    Go on, you can do it, it will only hurt a little :)

    Of course thats when you can find time in between taking selfies and twittering :)

    http://loadeddogma.blogspot.com.au/search?updated-max=2013-11-27T00:13:00%2B11:00&max-results=7

  62. Pyrmonter

    AH – financial intermediaries are leeches?

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