Dis looks like deflation
In January, reserve boards and economists smacked down Christine Lagarde, and others, for warning about the ogre of deflation. It isn’t deflation, said the Financial Times, it is disinflation. [FT apparently hates being quoted because I got a stern warning after cutting and pasting.] But FT admitted that even dis can be troublesome:
But a prolonged period of either disinflation or falling prices can weaken demand because consumers and businesses will put off spending decisions in the expectation that prices will be even lower in the weeks and months ahead. And it can be catastrophic for economies with high levels of debt.
Last week, Marketwatch had two articles on deflation. The first asked, Are you ready for deflation? U.S. prices are tracking eerily with 1990s Japan
Forget the consumer price index published by the U.S. Department of Labor. Forget the personal consumption expenditures price index published by the U.S. Department of Commerce. Look, instead, at the market-based PCE price index—the only one that is based solely on actual prices paid in the market.
It has been tumbling alarmingly, sinking in the fourth quarter of last year to an annual inflation rate of just 0.8%.
The market-based PCE, says the Commerce Department’s Bureau of Economic Analysis, is “based on market transactions for which there are corresponding price measures.” That means, the Bureau adds, that the market-based PCE “provides a measure of the prices paid by persons for domestic purchases of goods and services.”
Some of us thought that was the definition of inflation. The market-based PCE, observes Albert Edwards, chief global strategist at SG Securities, “excludes prices which the statisticians have to invent!”
Edwards, in a new research note, points out that this purely fact-based inflation indicator is undershooting the better known ones, such as the regular PCE and the CPI. And, he adds, it is undershooting by more and more.
European deflation is about to be exported globally. It is already set to create a spiralling debt crisis in Europe — and may trigger one elsewhere.
Just because the ECB has decided to ignore it does not mean that deflation is not starting to take hold of Europe. Just take a look at the figures.
The annual inflation rate in Cyprus is now minus 1.6%. In Greece, it is minus 1.4%. Annual price rises are running at 0.8% for the whole of the euro area, a statistical whisker away from outright deflation. The monthly figures were even more alarming. In January, prices fell in every euro zone country apart from Latvia, Estonia, and Slovakia. In Italy, prices dropped by 2.1% in a single month.
And today the New York Times allows that low inflation might have some people concerned about deflation: Euro Zone Inflation in Surprise Fall to 0.7%
Pressure on the European Central Bank to do more to prevent prices from falling in the 18-country eurozone ratcheted up Monday after figures showed inflation across the region unexpectedly fell in February to its lowest level since October. …
The figures are likely to reinforce concerns in the markets that the eurozone risks suffering a bout of deflation, or falling prices.