April 30, 2013

U.S. housing prices crested just about seven years ago in the spring of 2006.  The sub-prime mortgage loan crisis struck in the summer of 2007, and much of the world slipped into an awful recession in 2008.  By 2009, deficit government spending swelled, and nominal central bank interest rates were approaching zero in the who’s who of developed economies.  Quantitative easing ensued, and warnings proliferated that the accommodation of fiscal red ink by ballooning central bank balance sheets would surely create a surge of inflation within a year or too. 

It’s now a third of the way through 2013, and the dominant price trend continues to be disinflation with a few places like Japan and Switzerland experiencing deflation.  Disinflation is a diminishing pace in the secular trend rise of prices.  Deflation occurs when the general level of prices is outright falling.  Deflation is worse than inflation because it’s associated with low and, in many cases, negative real economic growth and because it’s harder to stop than inflation.  The U.S. economy during the  presidency of Jimmy Carter is widely stigmatized by historians as a period of accelerating inflation.  He inherited a 12-month 5.2% rate of CPI inflation and left four years later with an 11.8% rate.  Inflation averaged 8.3% over the full four years.  Less widely remembered is the 3.2% per annum rate of real growth in those years.  Japan slipped into a deflationary state of mind a decade and a half ago and is still stuck in that quicksand despite numerous policy counter-measures.  Japanese GDP averaged 0.6% per year in the fifteen years between 4Q97 and 4Q12, that is since the onset of deflation.

The sounds of disinflation have lately been heard all around.  Here’s a few instances.

  • Harmonized CPI inflation in the euro area was today reported at a 12-month rise of just 1.2%, down from 1.7% in March and 2.6% in April 2012.  Core inflation dropped to 1.0% from 1.5% the month before and 1.6% a year ago.
  • Euroland’s largest economy, Germany whose political leader Chancellor Merkel implied was in need of an interest rate increase (not cut), has CPI inflation of 1.2% and wholesale price inflation of 0.3%, lowest since end-2009.
  • The European purchasing manager indices due this week are likely to reflect sharply reduced input price pressures.
  • The U.S. core personal consumption price deflator registered a 1.1% 12-month rise in March, down from February’s 1.3%.
  • The wage component in the U.S. quarterly employment cost index released today was 1.6%, down from 1.7% a year ago.
  • U.S. consumer prices went up 1.5% in the year to March, lowest since last July.
  • Chinese consumer price inflation fell sharply to 2.1% in March.  Producer prices that month were 1.9% lower than in March 2012.
  • South Korean producer prices were 2.4% lower in March than a year earlier.
  • Swiss consumer prices were 0.6% lower in March than in March 2012.
  • In Sweden where inflation is hovering at virtually zero, central bank officials project the core CPI will average just 1.0% this year and 1.4% in 2014.
  • The latest 12-month change in Japanese consumer prices excluding fresh food and energy was a drop of 0.8% between March 2012 and March 2013.
  • Canadian consumer price inflation slowed from 1.2% in February to 1.0% in March.  Core and headline inflation are expected to stay below the Bank of Canada target of 2.0% until the second quarter of 2013.

A notable exception from 2013 norms concerns Britain where consumer prices are presently 2.8% above a year ago and have recorded non-stop 12-month increases of more than the targeted 2.0% since January 2010.  But even there, the rate of increase, though excessive, has diminished considerably since cresting at 5.2% in the year to September 2011.

To judge whether monetary policy is recklessly inviting inflation, one has to assess the circumstances in which it is operating.  In the Great Recession, factors of production became enormously under-utilized.  Most developed economies still lie years shy of full employment.  Sovereign debt markets understand these concepts better than the inflationary Cassandras.

Copyright 2013, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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