June 8, 2010

WE'RE ABOUT TO DEUNIONIZE THE CIVIL SERVICE...:

The deflation dilemma: Rich countries must act to prevent prices from falling. That will cause problems for emerging economies (The Economist, Jun 3rd 2010)

In America, the euro area and Japan, deflation is either uncomfortably close or a painful reality, despite near-zero interest rates and other efforts by central banks. In the year to April core consumer prices rose by a mere 0.9% in America, the slowest pace in four decades. In the euro area they rose by 0.7%. And in Japan, which has battled falling prices for more than a decade, they fell by 1.5%.

Nor is there much reason to expect a sudden turnaround. Broad measures of money and credit growth are stagnant or shrinking in all three places. Unemployment is high and there are large gaps between the economies’ actual output and their potential. In the euro area, especially, austerity plans will further sap domestic demand. Thankfully, there is unlikely to be a sudden price plunge, not least because ordinary people still expect consumer prices to rise modestly, and these expectations of future inflation help anchor actual prices. But the short-term balance of pressures clearly points downward.

So, too, does the balance of risks. Deflation, if it becomes entrenched, is more dangerous than most forms of inflation. When prices fall consumers put off their purchases in anticipation of even greater bargains later, condemning the economy to a vicious cycle of weak spending and sliding prices. In heavily indebted economies falling prices would increase the real burden of consumers’ and governments’ debts.


...which will further reduce the only inflationary pressure that matters, that on wages. And there is no chance of altering the other factors that are contributing: technology, demographic decline, and free trade. But we've been in this deflationary epoch for 30 years now and there's no sign of consumerism slowing. It's good deflation, for us at any rate.



Posted by Orrin Judd at June 8, 2010 5:44 AM
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