Archive for the ‘Deflation’ Category
Friday, May 21st, 2010
This seems a surprising prospect at the moment, but according to Telegraph.co.uk this morning, Andrew Roberts, head of European rates strategy at RBS, said: “Great Depression II” could now be approaching; adding: “It now has the potential to speed toward its conclusion; a European $1 trillion package which does little and political panic tells you we are about to reach the end of the road. The world should be discussing deflation, not inflation.”
This apocalyptic view has been put forward as stock markets have fallen all over the world in the past couple of weeks. It seems that investors have been taking fright at the degree of ‘fiscal tightening’ taking place around the world. Also, there is the chance of a further liquidity crisis as some hedge funds are liquidating their positions in order to preserve capital.
Markets have also been responding to the euro crisis and the Greek debt debacle, and wondering whether the eurozone can actually survive in its present form. The recent collapse of the euro and its implications for trade, feature in an article today written by Grant Lewis, Head of Economic Research, at Daiwa Capital Markets Europe Limited. His article, entitled, “The weaker euro – who benefits” is reproduced below.
With the euro down almost 20% against the dollar since the Greek crisis blew up at the end of last year, European politicians seemingly doing their utmost to undermine the currency, and reports that fund managers are deserting the currency, a weaker euro looks here to stay. For many exporters based in the euro area, that will provide a welcome shot in the arm. But which economies will benefit the most from a weaker euro?
 Extra-euro area exports Sources: ECB, Eurostat and Daiwa Capital Markets Europe Ltd.
The chart above provides a rough guide to the relative importance of exports to the non-euro world for each participating member state. A few things stand out:
• Two small island economies – Ireland and Malta – stand to benefit greatly from a weaker euro (although, given the importance of the UK in their trade and the recent weakness of sterling, the chart probably exaggerates the boost from recent market events.)
• A middle ‘core’ group, which includes Germany, the Netherlands and Belgium, should also get a noticeable boost to economic growth from exports.
• But those countries at the eye of the fiscal storm in the euro area – Greece, Portugal and Spain – are the three countries that will benefit the least from a weaker currency. Italy, which has suffered from anaemic growth over recent years, and France, which has also repeatedly run current account deficits over each of the past five years, can also expect to receive little benefit from a softer euro.
Of course, a weak euro is not unambiguously good news for the euro area economy. For example, the resulting increase in import prices will hit real household incomes, which are already under pressure from pay cuts in public sectors, further dampening consumption growth. And it will do nothing to resolve the existing large imbalances within the euro area itself. Indeed, overall, we think that events in the forex market will simply exacerbate existing trends. The Germanic core will get a further boost to their ruthlessly efficient export sectors. But the crisis-hit and woefully uncompetitive Club Med countries, which were already faced with the poorest growth prospects, will get little or no benefit to demand.
Tags: credit crisis, depression, eurozone, trade
Posted in Deflation, Exchange Rates, eurozone, recession | No Comments »
Monday, June 22nd, 2009
Professor Greg Mankiw of Harvard University has just pointed out that the CPI figure in the US which has moved into negative territory, may be exaggerated because it is based on a “trimmed mean estimate”, which removes the large relative price changes in each month.
He says: “As every grade school student learns when the teacher reports results of the latest test, the average of any data set can be thrown off by a few extreme outliers; the median is a more robust statistic to estimate the central tendency in the data.
“Right now, the two measures of inflation are diverging substantially. The standard CPI shows deflation over the past year, but that average is due to a few anomalous sectors, such as energy. If you look at the median CPI, which shows what a more typical price is doing, the inflation rate does not look very unusual.”
In fact the Federal Reserve Bank of Cleveland maintains such a “median” measure which can be seen in the graphic below. To view a larger image of the graph click here.
 Source: Federal Reserve Bank of Cleveland
Whether this shows that deflation is not currently a threat in the US is open to further interpretation. I have unearthed an article by Bryan and Pike (1991) and published by the Cleveland Fed which concludes:
“Differences between changes in the CPI and the median consumer price change underscore the impact of the distribution of price movements on our monthly interpretation of inflation. The median price change is a potentially useful indicator of current monetary inflation because it minimises, in a non-subjective way, the influence of these transitory relative price movements.”
However, the authors go on to say that: “Whether the median change is an accurate long-run inflation measure is an entirely different matter – one that depends in part on whether monetary inflation causes, or otherwise perpetuates, relative price fluctuations …. It may be that monetary inflation and relative price changes are related. One possible linkage may be through a monetary transmission mechanism, whereby changes in the quantity of money influences all prices, but at different times. If fluctuations in the distribution of price changes are predominantly monetary in origin, then what economists commonly disregard as relative price noise may actually be leading (or lagging) indicators of a more broadly transmitted monetary inflation.”
So, perhaps the evidence is not quite as transparent as Mankiw suggests.
Tags: CPI, Deflation, Inflation, US
Posted in Consumer Price Index, Deflation, Interest rates, US economy | No Comments »
Tuesday, June 16th, 2009
The inflation figures released this morning took many analysts by surprise. The general view was that CPI inflation would fall to 2.0%, which would put it bang on the Bank of England’s target. However, CPI inflation did fall in May but only from 2.3% down to 2.2%. This continues to put us well above the EU average, which currently stands at 1.2%.
The largest downward pressure on CPI inflation came from food and non-alcoholic drinks coupled with lower electricity prices. By contrast, the biggest upward pressure came from alcohol and tobacco, which reflected an increase in excise duty in this year’s Budget. There were also increases in the price of dvd’s and televisions.
The changing inflationary trend can be seen in the graphic below.
 Source: ONS
RPI inflation, which includes mortgage interest payments, was already in negative territory in April at -1.2%, but this rose slightly in May to -1.1%. This measure was mainly affected by the same pressures as the CPI figure, but there was a slight rise in average mortgage interest payments this year compared to a year ago. At least this figure did not move further into negative territory, which would have increased the risk of a deflationary episode.
RPIX inflation, which is the RPI minus mortgage interest payments, fell from 1.7% in April to 1.6% in May.
The markets responded positively to these figures as they were taken as indicating a possible robustness in the economy, and the pound rose against both the euro and the dollar.
General expectations are that CPI inflation will continue to fall in the months ahead although there is some concern about the unknown effects of quantitative easing on future inflation levels.
Tags: CPI, EU, Inflation, quantitative easing, RPI, RPIX
Posted in Bank of England, Deflation, Inflation, sterling | No Comments »
Wednesday, May 20th, 2009
In April 2009 the Retail Prices Index (RPI) fell from -0.4% in March to -1.2% in April. This was the biggest fall in prices since records began in 1948. The recent fall into negative territory for the RPI has been due to the huge cut in interest rates over recent months, as the Bank of England has reduced rates from 5.0% to 0.5%. This has brought down mortgage interest rates which is a cost included in the RPI. This rate is still of significance because it is used by many employers for wage bargaining purposes and will serve as a constraint on the growth in average earnings.
The measure which the Bank of England targets at 2% is the Consumer Prices Index (CPI) and this also fell at a faster rate than economists were forecasting in April. It fell from 2.9% in March to 2.3% in April, although this is still higher than the 0.6% recorded in the eurozone and most other major developed economies. The recent changes in the UK inflation rates can be seen in the graphic below.
 Source: ONS
The CPI declined due to falling gas and electricity bills and some cheaper food costs. However, food prices are still rising at a rate of 9.2% which is hitting pensioners and others on low incomes particularly hard. Core inflation, which strips out volatile elements such as energy prices and food, fell to 1.5% in April from 1.7% in March.
Why is UK CPI inflation still stuck above that of most other advanced countries? The main reason is the fact that sterling has depreciated by 25% since the middle of 2007, which has pushed up the prices we pay for imported goods. Around one-third of the goods used to measure the CPI are imported.
On balance, the Bank of England expects inflation to continue to fall and to be around 1% in a further two years time. Sterling appreciated slightly yesterday, and this coupled with increased unemployment fostering lower demand, will combine to keep inflation down.
Economists are divided over the future. Some think that inflation will continue to fall and that we might slip into a deflationary spiral as has affected Japan over the past twenty years. However, some others believe UK CPI inflation will remain stubbornly higher and that the Bank may have to increase interest rates sometime next year.
Tags: CPI, Deflation, food price inflation, Inflation, RPI, sterling
Posted in Deflation, Inflation, Interest rates, sterling | No Comments »
Thursday, May 7th, 2009
Consumer prices in the OECD area rose by 0.9% in the year to March 2009, according to figures released yesterday. This represents a continued fall when compared with the 1.3% price level recorded in the year to February. When taken on a month-by-month basis prices rose by 0.3% in March following a rise of 0.4% in February. The recent trend can be seen in the graphic below.
In the euro area prices were up by 0.6% in the year to March. When looking at specific countries the latest figures show increases of 1.2% in Italy and Canada, 0.5% in Germany and 0.3% in France. However, prices in the US decreased by 0.4% in the year to March and also fell in Japan by 0.3%. How then do we account for the fact that the latest CPI figure for the UK in March shows a rise in prices of 2.9%?
At least part of the answer stems from food prices. The OECD noted that prices for food in the OECD areas were up by 4.5% in the year to March and excluding food and energy consumer prices rose by 1.8% in the year to March 2009. However, food price inflation is running at a higher level in the UK than in any other OECD country except Iceland and Korea. The current year-on-year figure for the UK is given as 10.5%.
 Soource: OECD
Why such a high figure? This is partly due to the steep and rapid drop in the value of sterling which has fallen over 25% in the past year. Much of our food is imported and this fall in sterling raises the price of UK food imports. There is also some evidence that domestic food producers have been raising prices to take advantage of the higher costs of imported food. There are signs in recent months that the fall in sterling against other major currencies has stabilised and if sterling continues to pick up in value it should follow through into a lower CPI inflation figure in the months ahead.
Tags: Deflation, food price inflation, Inflation, OECD, sterling
Posted in Deflation, Inflation, OECD, sterling | No Comments »
Wednesday, April 22nd, 2009
The Retail Prices Index (RPI) actually fell to -0.4% in March, compared with a figure of zero growth in February. This is the first time that this figure has been negative since 1960. There was a large downward pressure on the index from housing with the main contributions being house depreciation and mortgage interest payments, both of which are excluded from the Consumer Prices Index (CPI).
In fact the CPI was 2.9% in March which was down from the 3.2% in February but still well above the government’s target figure of 2.0%.
Changes in the three major measures of UK inflation can be seen in the graphic below.
 Source: ONS
Why did the CPI fall? The largest downward contribution was from housing and household services and was mainly due to gas bills which fell this year. There was also a major downward contribution from food and non-alcoholic beverages with the prices of vegetables in particular, falling in price by more than they did last year. A third downward effect came from transport costs with airfares falling. Also, even though petrol rose slightly between February and March this year, it had risen even faster at the same time last year and so contributed to the downward pressure on the CPI. The biggest upward influence in prices came from the games, toys and hobbies category.
The RPIX, which includes the all items RPI but excludes mortgage interest payments, was 2.2% in March, down from 2.5% in February.
Finally, the CPI, which is taken as an internationally comparable measure of inflation, showed that the UK inflation rate was 3.2% in February whilst the figure for the EU as a whole was 1.7%.
Tags: CPI, Deflation, Inflation, RPI, RPIX
Posted in Deflation, Inflation | No Comments »
Friday, April 17th, 2009
Industrial output in the 16 countries of the eurozone area fell by 2.3% in February compared to the previous month. Overall, this meant that when February’s output was compared with a year earlier it had fallen by 18.4%.
There has been a general cutback in industrial output as the recession has worsened and demand fallen. However, the fall in February was particularly driven by a 4.3% fall in the production of durable goods such as cars, and a 3.0% fall in capital goods such as machinery.
 Eurozone industrial output is crashing
The Organisation for Economic Co-operation and Development has forecast that the eurozone area will see a contraction in GDP of 4.1% this year and a fall of 0.3% next year. This largely equates with the view of the European Central Bank (ECB) although they expect a gradual recovery in 2010.
It was also announced yesterday that euro area annual inflation was at 0.6% in March, which was the lowest rate since the euro was introduced ten years ago. This marked a fall from a reading of 1.2% for inflation in February, and some commentators feel it will fall below zero in the coming months, bringing with it the possibility of a period of deflation.
The ECB which reduced its main interest rate to 1.25% in April, has flagged that it still has room to reduce rates further in May, in order to give a boost to the economy.
Tags: ECB, eurozone, industrial output, Inflation
Posted in Deflation, European Union, Inflation, eurozone, recession | No Comments »
Thursday, April 16th, 2009
US consumer prices fell in March by 0.1% on the previous month, and 0.4% on the same month a year ago. This is the first time that deflation has been seen in the US since 1955.
Deflation is of particular concern because it can persuade consumers not to buy now, but to wait for a bargain as prices fall further. It also hits company profits since firms will be buying in their raw materials at relatively higher prices and selling their finished products at relatively lower prices.
These figures had not been anticipated by forecasters. The change in prices on the month showed falls in energy prices of -0.3%; food -0.1%; clothing -0.2%; and, transport -1.1%.
So, do these figures suggest that the US is about to enter some sort of deflationary spiral, where declines in prices, wages and output take turns to drive the economy downwards?
The answer to that is probably not. The main cause of the fall in prices has been the sharp turnaround in oil prices which spiked upwards last year reaching $147 in June and then fell back to the current level of around $50 a barrel. In fact, according to the US Labor Department figures, consumer energy bills have fallen 23% since March 2008, and transportation costs, which include the price of petrol and cars, fell by 13% over the same period.
When the most volatile elements in the consumer price index, energy and food, are removed, a figure of +1.8% year-on-year inflation is revealed. This suggests that the US does not need to move into panic mode just at the moment. In fact, some commentators are more worried about the possibility of runaway inflation sometime in the future as a result of the economic stimulus.
Tags: consumer prices, Deflation, Inflation, US
Posted in Deflation, Inflation, US economy | No Comments »
Tuesday, March 24th, 2009
Just published by the ONS at 9.30am today, the latest inflation figures show that the Consumer Prices Index (CPI) annual inflation - which is the government’s target measure – rose by 3.2% in February. This was up from 3.0% in January.
This means that the CPI is moving away from the Bank of England’s 2.0% target, after the Bank has been telling us that this measure of inflation was going to fall sharply this year.
Why has it risen? According to the ONS the largest upward pressure was from food and non-alcoholic beverages, with the largest individual component being an increase in the price of vegetables.
The recent trend can be seen in the figure below.
 Annual Inflation Rates - 12 month percentage change. Source: ONS
There were also other large, upward pressures on the CPI from recreation and culture, particularly toys and computer games; transport costs due to the price of petrol rising 3.2 pence per litre between January and February; household equipment, with rises in the prices of major appliances and household goods; and, clothing and footwear where prices rose by more than a year ago.
The only large downward pressure came from the fact that gas and electricity bills were unchanged this year after having risen a year ago.
The Retail Prices Index (RPI) fell to 0.0% in February, which was a fall from the 0.1% registered in January. This index was affected in much the same way as the CPI but with the exception of the downward pressure from housing as mortgage interest payments continued to fall reflecting the drop in base rates. These payments are excluded from the CPI index.
The latest international comparison shows that UK inflation is running well ahead of that in the EU as a whole. This shows a UK figure for the CPI in January of 3.0% compared with a provisional figure for the whole of the EU of only 1.7%.
With such upward pressure on prices it appears that deflation is not on the immediate horizon.
Tags: CPI, Deflation, Inflation, RPI
Posted in Deflation, Inflation | No Comments »
Tuesday, March 17th, 2009
China, which is now the world’s third largest economy, saw its exports drop by 25.7% in February compared to a year earlier. Imports also fell by 24.1%. This meant that the country’s trade surplus fell from $39.1 billion in January to $4.8bn last month.
China is very dependent on its manufactured exports, and the sudden global recession has seen the demand for these goods hit a wall. The Chinese commerce minister was quoted as saying that the slump in exports is unlikely to end soon and he warned that there would be a “grim picture” for trade in the coming months.
 The picture will be "grim" over the coming months.
The country has approved a fiscal stimulus composed of tax cuts and increased spending on the infrastructure amounting to $586 billion. In fact, latest figures show that investment in roads, railways and power grids actually rose by 26.5% in the first two months of this year compared to the same period in 2008.
Some good news is that February saw a 25% increase in the sale of new cars compared to the same month last year. This is because the government has made large cuts in sales tax on small, fuel-efficient cars.
However, prices in China actually fell for the first time in over six years in February, raising the spectre of deflation. The consumer price index actually fell by 1.6% in the month compared to a year earlier, which followed on from a rise in prices of 1% in January. In fact, in February last year the index recorded a rise of 8.7% which reflects a very sharp turnaround in inflation. Also, factory gate prices fell by 4.5% in February. The official statistical agency claimed that it was too early to start talking about deflation and that the falls in prices were mainly due to lower raw material prices and statistical distortions.
Tags: China, Deflation, exports, trade surplus
Posted in Balance of Trade, China, Deflation, Fiscal stimulus, Inflation, World Trade | No Comments »
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