Ze, 'Ow you say, Deflation Watch. Eurozone edition

Graham_Devon

michaels wrote: »

Inflation 1.2% in Euroland and falling, if food and energy costs go the right way this could very soon be negative...

And very welcome that will be! (IMO!!)

Generali

michaels wrote: »

Time to dust of this thread methinks:

http://www.bbc.co.uk/news/business-22550560

Inflation 1.2% in Euroland and falling, if food and energy costs go the right way this could very soon be negative...

Interesting times old fruit, interesting times.

At what point does disinflation (prices falling) become deflation I wonder (a persistent and continuous tendency for prices to fall)?

The new data are out in a couple of weeks which should see some big falls in Eurozone inflation caused by the same things that have caused the CPI to drop. It'll be interesting to see what the policy response is.

tomterm8

Disinflation becomes deflation when everyone decides the central bank either can't or won't cause inflation.

I've come to the conclusion disinflatiion is a certainty, and deflation is possible but not probable in the eu.

Thrugelmir

Generali wrote: »

It'll be interesting to see what the policy response is.

Maybe time to stop the interference and let natural forces go to work. Eurozone unemployment is steadily rising. So the fixed currency will merely prove to be a greater and greater strain on the weaker parties.
The problems of recent years have merely been kicked along. No one as yet is taking responsibility to address them.

purch

When habits change, it's very difficult to reverse

It was a long and painful ride to finally defeat high inflation, in part due to peoples habits and expectations

Once disinflation takes hold the journey to deflation is short and reversal a long process

Generali

purch wrote: »

When habits change, it's very difficult to reverse

It was a long and painful ride to finally defeat high inflation, in part due to peoples habits and expectations

Once disinflation takes hold the journey to deflation is short and reversal a long process

IIRC, prices fell for a few months in the UK in 2008. Prices down 0.5% in Germany on the month: aberration or trend? Time will tell.

michaels

Generali wrote: »

IIRC, prices fell for a few months in the UK in 2008. Prices down 0.5% in Germany on the month: aberration or trend? Time will tell.

I think it was only RPI that turned negative.

I also don't think the UK is a good comparison. Everyone deep down 'knows' that in the UK we see inflation not deflation and thus we are unlikely to adjust behaviour towards a deflationary enviroment unless it lasted for several months. Whereas perhaps the average German see price stability as the norm and thus could more easily imagine that deflation could be a real and lasting phenomenon and adjust behavoiur accordingly much more quickly?

Generali

michaels wrote: »

I think it was only RPI that turned negative.

I also don't think the UK is a good comparison. Everyone deep down 'knows' that in the UK we see inflation not deflation and thus we are unlikely to adjust behaviour towards a deflationary enviroment unless it lasted for several months. Whereas perhaps the average German see price stability as the norm and thus could more easily imagine that deflation could be a real and lasting phenomenon and adjust behavoiur accordingly much more quickly?

Interesting times old fruit.

Germans had that whole readjustment thing where they saw real wages fall so they are used to finances not being on a ratchet. They have also gone from being net importers to being net exporters, i.e. going from consuming more than they make to consuming less.

Those are great precursors to deflation, I agree.

If it happens than I don't know how the Germans are going to be able to cope with it culturally. The Big Beast has been inflation and Buba took great care to keep that dragon in his cave. What happens if inflation needs to be stoked not subdued? It goes against the whole culture of political-economy (to use the old phrase) in Germany.

One way or another, the decisions that we all made over the last 5 years and will make over the course of the next 5-10 will make the history books for our Grandkids just as the decisions of the 1920s and 30s made ours. Your thrift may be seen as negative as the extravagances of the last decade. Or not of course.

Time will tell.

ILW

Why the great fear of deflation?
Surely it can be solved overnight by the simple measure of just increasing VAT?

Generali

ILW wrote: »

Why the great fear of deflation?
Surely it can be solved overnight by the simple measure of just increasing VAT?

That's to confuse disinflation (falling prices) with deflation (the persistent and continuous tendency for prices to fall).

The difference is subtle but important.