August 16, 2015

DEFLATION IS A CHANGE IN THE COST OF LIVING:

Low pay, low inflation and low interest rates? This is not 1975 (Larry Elliott,  16 August 2015, The Guardian)

There's nothing the US Federal Reserve would like more than to be able to announce in September than the first increase in the cost of borrowing in nine years. The Bank of England feels the same way.

The reasoning is simple. The end of ultra-low interest rates would be a sign that life was back to normal. When central banks cut their policy rates virtually to zero it was as an emergency measure. Raising rates would symbolise that the emergency is now over.

But the process of interest-rate normalisation is taking much longer than expected. Last month, Mark Carney tested the water when he said the Bank would be considering a rate rise around the turn of the year. But he appears to be struggling to persuade a majority of the nine-strong monetary policy committee to share his view. The Fed looks closer to a rate rise, but in neither the US nor the UK is the economic data conclusive.

Indeed, the latest set of figures for the UK labour market would argue for Threadneedle Street to be cautious. Unemployment rose for the second month in a row, there was a fall in employment that would have been bigger had it not been for an increase in non-UK citizens in work, and earnings growth either stalled or fell, depending on the measure used.

When the latest set of inflation figures are released on Tuesday, they are expected to show no change in the cost of living as measured by the consumer prices index over the past year. Recent falls in oil and commodity prices, coupled with the cheapening of imports more generally due to a stronger pound, will probably result in inflation turning negative again over the coming months. 

Had the Fed understood that we were in a deflationary cycle in the first place, it never would have prompted the Recession. Rates should have been at zero (or lower) since the '90s.

Posted by at August 16, 2015 8:22 AM
  

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