Inflation or Deflation, where are we going ?

dopester

At least a couple of decades of deflation.

JP45

dopester wrote: »

At least a couple of decades of deflation.

Not sure about a couple of decades but I am beginning to lean more towards the idea of a prolonged period of deflation (contrary to what I said in a previous post). I've recently been reading more and more articles from leading ecomomists pointing out the severity of the downturn and the growing prospect that this could well result in years of Japanese style deflation, as for example the following articles from Nouriel Roubini and Martin Wolf:

http://www.rgemonitor.com/roubini-monitor/255627/the_worst_economic_and_financial_crisis_since_the_great_depression_reveals_the_weaknesses_of_the_laissez_faire_anglo-saxon_model_of_capitalism#readcomments

http://www.ft.com/cms/s/0/774c0920-fd1d-11dd-a103-000077b07658.html

Graham_Devon

Personally and I could be very wrong here, but I don't think deflation is going to be drawn out that long.

My reasons being, we rely on mainly imports. As the pound falls, prices get higher. Fuel, food, domestic energy, cars, domestic appliances etc.

So all those things, would, in effect get more expensive, which has the opposite effect of deflation.

If fuel is this price now, at $40 dollars (ish) a barrel. What happens when it goes to $70-90 per barrel? Prices of £1.50 per litre will suddenly be the norm.

Of course, this could all change if for some reason the pound gets stronger, which I personally cannot see happening for some time. If it did however get stronger, deflation will be more severe.

I may, of course, be talking rubbish, but hopefully have explained what I mean. We can't just stop spending on fuel, domestic fuel and food. So no matter how much we stop spending, those goods, will always effect inflation.

kt63_2

The falling Pound is an important factor that is likely to lead to inflation. However more severe inflation would be caused if all major currencies fell relative to commodities. This is what would happen if there was a widespread crisis in confidence of the value of fiat currencies. This whole financial crisis is causing people to question exactly "what is money." Many are realising that it is not quite as "solid" as they thought it was. This makes non-perishable commodities such as gold, or ,God forbid, property appear attractive investments.

bandraoi

Graham_Devon wrote: »

Personally and I could be very wrong here, but I don't think deflation is going to be drawn out that long.

My reasons being, we rely on mainly imports. As the pound falls, prices get higher. Fuel, food, domestic energy, cars, domestic appliances etc.

So all those things, would, in effect get more expensive, which has the opposite effect of deflation.

If fuel is this price now, at $40 dollars (ish) a barrel. What happens when it goes to $70-90 per barrel? Prices of £1.50 per litre will suddenly be the norm.

Of course, this could all change if for some reason the pound gets stronger, which I personally cannot see happening for some time. If it did however get stronger, deflation will be more severe.

I may, of course, be talking rubbish, but hopefully have explained what I mean. We can't just stop spending on fuel, domestic fuel and food. So no matter how much we stop spending, those goods, will always effect inflation.

This is my thinking too.
Massive inflation and soon. The UK manufactures and grows little.

Sterling is weak and is now a small isolated currency as people look for the security of bigger international denominations - mostly the dollar and the euro.
Businesses now are selling the last of the stock they bought under contracts agreed last year when sterling was stronger.
Now as the renegotiate, prices are going to rise massively.

JP45

Graham_Devon wrote: »

Personally and I could be very wrong here, but I don't think deflation is going to be drawn out that long.

My reasons being, we rely on mainly imports. As the pound falls, prices get higher. Fuel, food, domestic energy, cars, domestic appliances etc.

So all those things, would, in effect get more expensive, which has the opposite effect of deflation.

If fuel is this price now, at $40 dollars (ish) a barrel. What happens when it goes to $70-90 per barrel? Prices of £1.50 per litre will suddenly be the norm.

Of course, this could all change if for some reason the pound gets stronger, which I personally cannot see happening for some time. If it did however get stronger, deflation will be more severe.

I may, of course, be talking rubbish, but hopefully have explained what I mean. We can't just stop spending on fuel, domestic fuel and food. So no matter how much we stop spending, those goods, will always effect inflation.

This was also, until very recently, my own line of thinking. It seemed to me highly likely that a furher loss of confidence in the UK - particularly given the rapidly deteriorating state of the Government's finances - would lead to a further fall in sterling and hence a rise in inflation. However, the articles I posted earlier (by Nouriel Roubini and Martin Wolf), plus others along similar lines, are leading me to wonder whether the UK will fare any worse (or at least much worse) than most other nations.

Each day seems to bring fresh horror stories from around the world - rapid falls in GDP amongst both importing and exporting nations (witness the recent figures from Germany and Japan), looming banking crises in Eastern Europe to which many West European banks are heavily exposed etc. Given the global spread of the downturn, to which virtually no nation seems immune, is it realistic to assume that sterling will continue to weaken against other currencies. Given the worsening state of the US goverment deficit / debt, might the dollar not come under pressure or are we to assume that its reserve currency status will provide it with lasting immunity? Likewise, with the prospect of Germany / the ECB having to bail out weaker member states, isn't it at least conceivable that the Euro would also decline?

lynzpower

I think im inclined towards inflation too. Although it stands that we have to import most of what we consume, there is the real fact we are consuming less of it, and producers are going out of business, this then means whomever is left in the reducing marketplace can cartel effectivlely pricefix if that product is truly in demand.

Less is produced and competition thus restricted.

Generali

JP45 wrote: »

Not sure about a couple of decades but I am beginning to lean more towards the idea of a prolonged period of deflation (contrary to what I said in a previous post). I've recently been reading more and more articles from leading ecomomists pointing out the severity of the downturn and the growing prospect that this could well result in years of Japanese style deflation, as for example the following articles from Nouriel Roubini and Martin Wolf:

http://www.rgemonitor.com/roubini-monitor/255627/the_worst_economic_and_financial_crisis_since_the_great_depression_reveals_the_weaknesses_of_the_laissez_faire_anglo-saxon_model_of_capitalism#readcomments

http://www.ft.com/cms/s/0/774c0920-fd1d-11dd-a103-000077b07658.html

I agree. In one way the UK is better off than Japan as the housing bubble hasn' gone as far as theirs did. In one was the UK is way worse off due to the level of Government, corporate and especially household debt.

Jonbvn

JP45 wrote: »

Each day seems to bring fresh horror stories from around the world - rapid falls in GDP amongst both importing and exporting nations (witness the recent figures from Germany and Japan), looming banking crises in Eastern Europe to which many West European banks are heavily exposed etc. Given the global spread of the downturn, to which virtually no nation seems immune, is it realistic to assume that sterling will continue to weaken against other currencies. Given the worsening state of the US government deficit / debt, might the dollar not come under pressure or are we to assume that its reserve currency status will provide it with lasting immunity? Likewise, with the prospect of Germany / the ECB having to bail out weaker member states, isn't it at least conceivable that the Euro would also decline?

IMHO I just don't see sterling and other currencies as big an issue as it was a few months back. Therefore, I do not believe that this can be used to substantiate an argument for inflation.

My perception is that our (me & OH) personal rate of inflation seems to have dropped sharply since Christmas.

Wookster

Generali wrote: »

I agree. In one way the UK is better off than Japan as the housing bubble hasn' gone as far as theirs did. In one was the UK is way worse off due to the level of Government, corporate and especially household debt.

Also somewhat worse off due to the huge trade deficit. My thoughts are that we'll see asset prices falling for an extended period but everyday goods such as food & energy/ fuel staying in positive inflationary territory.