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

ILW

Generali wrote: »

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

The difference is subtle but important.

The published inflation figures used to set benefits etc do include changes in tax and duties though.

Thrugelmir

michaels wrote: »

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.

The Eurozone allows free movement of labour. 19.2 million people are now officially out of work. There could be huge downward pressure on wages. As people seek to earn a living somewhere.

Generali

ILW wrote: »

The published inflation figures used to set benefits etc do include changes in tax and duties though.

Think of it at the micro level.

If you're struggling to sell your goods and thus having to cut prices, if the Government slaps on a tax then you're likely to have to cut prices still further to make up for the tax.

The tax might make the CPI number start with a plus sign but it has made things worse and will simply lead to more deflation in future.

ILW

Generali wrote: »

Think of it at the micro level.

If you're struggling to sell your goods and thus having to cut prices, if the Government slaps on a tax then you're likely to have to cut prices still further to make up for the tax.

The tax might make the CPI number start with a plus sign but it has made things worse and will simply lead to more deflation in future.

So CPI is not a true indicator of inflation and price rises or falls caused by changes in taxation should be discounted?
Is this net figure published?

Generali

ILW wrote: »

So CPI is not a true indicator of inflation and price rises or falls caused by changes in taxation should be discounted?
Is this net figure published?

Not as far as I am aware.

You can make a ballpark calculation that the overall price level will change by about half the change in VAT as half of goods have VAT on them.

As the NSO publishes data by part of the economy you could also roughly work out the impact of an increase in fuel duty for example.

Don't forget that RPI/CPI are designed to measure changes in the cost of living not inflation. We just tend to use them as a proxy for inflation.

Perelandra

I don't think this has been said above in quite this way- if I missed it, I apologise.

I was taught that the danger of deflation is that it discourages growth and new businesses; when there's inflation, an individual or a company can be happy borrowing money to "get productive", as the real value of the £100 debt will be lower when the time comes to sell the product they have used financing to make.

However, when there's deflation, unless the borrower can persuade the lender to accept a lower level of return, when prices are falling there are significantly greater risks in borrowing to dun that business. Net result- more would-be borrowers decide not to grow their business, and fewer companies start up as there's less reward for taking that risk. The economy as a whole then stagnates more than it would do in a modest (but steady) inflationary cycle.

For those people in a job who manage to retain that job, or those with savings, deflation can be beneficial. For the economy as a whole, it's bad news. While existing business may or may not fold, there would certainly be less of a reason for new economic activity to start up.

Again, apologies if this has been said, or if it's just stating the obvious!

Generali

Perelandra wrote: »

I don't think this has been said above in quite this way- if I missed it, I apologise.

I was taught that the danger of deflation is that it discourages growth and new businesses; when there's inflation, an individual or a company can be happy borrowing money to "get productive", as the real value of the £100 debt will be lower when the time comes to sell the product they have used financing to make.

However, when there's deflation, unless the borrower can persuade the lender to accept a lower level of return, when prices are falling there are significantly greater risks in borrowing to dun that business. Net result- more would-be borrowers decide not to grow their business, and fewer companies start up as there's less reward for taking that risk. The economy as a whole then stagnates more than it would do in a modest (but steady) inflationary cycle.

For those people in a job who manage to retain that job, or those with savings, deflation can be beneficial. For the economy as a whole, it's bad news. While existing business may or may not fold, there would certainly be less of a reason for new economic activity to start up.

Again, apologies if this has been said, or if it's just stating the obvious!

It sums things up very nicely.

To the above I would add the following. It's tough to run a business when you buy something to sell for £100 and can then only sell for £98. It rather messes with your cashflow projections etc.

wotsthat

Perelandra wrote: »

For those people in a job who manage to retain that job, or those with savings, deflation can be beneficial. For the economy as a whole, it's bad news. While existing business may or may not fold, there would certainly be less of a reason for new economic activity to start up.

Some welcome deflation because, in the short term, their savings and earnings will go a little further. Longer term it's more of a drag on the economy - it's difficult to, say, build a factory, with a plan to manufacture in 2 years when the price of goods produced will be lower than when the project started.

As with inflation it'll be the same people that benefit from deflation (or at least do less badly) i.e. the economically productive.

Perelandra

Reading this thread has been interesting- I have a horror of the prospect of deflation, since 20 years ago I was told by my teacher that it was a "very, very bad thing" (his exact words). In the 25 years since I've had that as a core (economic) belief, but as with everything it's not actually a black-and-white issue.

Funny how your early education can fix you for life!

ILW

I think the Germans have a worse experience of what inflation can do than anyone has of deflation. Deflation tends to be self limiting, inflation can easily run away.