Inflation to rise dramatically?

Generali

michaels wrote: »

I suspect there is a fairly strong correlation between deflation and below trend growth (just as there is for run away inflation eventually)

Economic problems can cause deflation, that is undeniable. I just doubt that deflation will always cause economic problems.

It's a bit like saying cancer causes smoking IMO.

CLAPTON

the general view on deflation is that

- people delay in buying things because they know they will all be cheaper in the future
- business delay investment because they know they will be cheaper in the future
- deflation often means reduced wages which is more difficult to impose compared to simply freezing wages
- house prices fall and leave more people in negative equity which reduce mobility and peoples ability to seek work in a different area
- logically pensions, benefits etc should all fall which will create a lot of political and legal issues

michaels

Plus if nominal interest rates are collared at 0% then the real value of debt increases hurting borrowers whereas savers earning no interest probably do not adjust to the fact that the real value of their savings are increasing to counteract this.

In terms of the argument that falling prices delay purchases, technology prices have been falling in nominal (let alone real) terms for many years despite the depreciation of GBP and yet there is not a general consensus that it is not worth buying a TV / fridge / ipod because it will be cheaper in a year's time.

Having said that I do agree that correlation doesn't imply causality (I'd be out of a job if I didn't)

CLAPTON wrote: »

the general view on deflation is that

- people delay in buying things because they know they will all be cheaper in the future
- business delay investment because they know they will be cheaper in the future
- deflation often means reduced wages which is more difficult to impose compared to simply freezing wages
- house prices fall and leave more people in negative equity which reduce mobility and peoples ability to seek work in a different area
- logically pensions, benefits etc should all fall which will create a lot of political and legal issues

Generali

CLAPTON wrote: »

the general view on deflation is that

- people delay in buying things because they know they will all be cheaper in the future
- business delay investment because they know they will be cheaper in the future
- deflation often means reduced wages which is more difficult to impose compared to simply freezing wages
- house prices fall and leave more people in negative equity which reduce mobility and peoples ability to seek work in a different area
- logically pensions, benefits etc should all fall which will create a lot of political and legal issues

Absolutely I agree that is the general view but I have a different one.

Falling prices can simply represent improving efficiency at a time of slow monetary growth. An example would be 2,000,000,000 potential workers and consumers in India and China entering the capitalist economy in the late C20th and early C21st. When my son was 9 months old I bought all the clothes he needed to get through the winter for £28 from Tesco. I doubt you could have done the same with 28 pound notes in 1980, 25 years earlier.

So why is that deflation bad? I don't think it is, it just means increased living standards. Would you really not buy a TV because you could buy it for £490 in a year's time rather than £500 now? Maybe in bad times you'd delay the purchase but when the overtime and commission payments are coming in I don't think most people would.

CLAPTON

the fall in some specific prices is not in general considered deflation
deflation is the general fall in most /all prices/wages.

so the fall in the price of clothes is welcome, whilst the realisation that my house is in negative equity and that my employer is planning to reduce by salary by 20% have different consequences

as far as big tickets items are concerned, e.g. flat screen TVs etc, then people of course did delay buying them because of the certainty that the price would fall ... even though I could afford 3k for a TV, I waited several years until they fell to about 500 before I would buy them. In macro economic terms this delay made little difference to the overall level of demand in the economy and litttle difference to employment levels, house prices etc because on the whole the money was spent on other things.

Lets suppose Mr Generali wants to increase the prosperity of the Generali family and applies for a new job.... wonderful job, great interview, great lot of people... everything fantastic... until they discuss salary... they suggest 10% less than he is earning now on the basis that salaries are falling and Generali is likely to be earning 20% less in his current job in 12 months any way, so really their offer of only a 10% cut is really a rise.... difficult

Batchy

Inflation probably will rise - Price inflation
Wage inflation - most definately will fall over the next 2 years or be stagnant.

Impact - people get poorer, more of the current wages goes on essentials, less on luxuries

More pressure to increase wages (winter of discontent), therefore increase prices, therefore vicious circle of increasing everything, thats difficult to slow down in the short term/medium term.

result, eventually, debt gets erroded, as wages will ultimately have to play catch up.

Best place to be, cheap assets, can anyone else think of useful assets that are cheap (cheap being debatable) at the moment?