Tuesday, Dec 16, 2008
Exposing the myth behind deflation predictions
Telegraph: Price of fresh food rises again, figures show
The annual rate of food inflation rose from 10.1 per cent to 10.8 per cent. Howard Archer, chief UK and European Economist at Global Insight, said: "Sterling is having an impact as most of our fruits are imported. This is not something that is going to disappear." As an aside, Mervyn King's chief role has always been to shape expectations in his announcements, and today's missive that deflation could happen 'soon' is no exception. Meanwhile inflation is still 110% above target.
Posted by paul @ 05:16 PM (723 views) Add Comment
11 Comments
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1. alan said...
If our government tried to do their job properly, we wouldn't need Mervyn to "shape expectations" and we wouldn't need all the spin either.
All we learn from this is: Don't trust the government.
2. drewster said...
Continuing the earlier conversation.....
We're worried about inflation because we're worried that the government will print its way out of debt. This would push up wages and house prices, erode our hard-earned savings, and bail out evil landlords and smug home-owning friends.
For house prices to rise, wages need to rise (a lot).
For wages to rise, companies need to be making money.
But companies aren't making money. This year we've had a constant stream of profit warnings. All sorts of industries are begging for bailouts.
In conclusion, I think there will be deflation. As Mish says, "Deflation is intensifying. People are going to be frightened by it." (source: Mish: Expect Smaller If Any Pay Raises In 2009)
3. techieman said...
Paul you have a real bee in your bonnet about this..... ok you are right - does that make you feel better?
4. drewster said...
According to the article: "The biggest increase was in the price of fruit, which is largely imported from abroad and is most likely due to the collapse in sterling, which makes it more expensive to import goods from overseas."
It's entirely possible to have both rising costs of imported goods AND falling costs of domestic goods & services at the same time. If the pound falls 50%, the price of coconuts will rise 50% but your hairdresser isn't going to raise his prices 50%. If anything he'll cut prices because people suddenly have less disposable income. Thus wages can fall even as the pound falls. It's only after a few years when all the unemployed hairdressers have found jobs in export industries that the pound will start to rise again.
Look at what's happening in Iceland. Massive devaluation of the currency but simultaneously massive increase in unemployment. Until all the newly unemployed people can find jobs, there will be deflation all round.
5. paul said...
techieman, I'm not trying to get one up on you. I'm not really that kind of person.
In fact, this afternoon I've been looking into this more and I've come to the conclusion that perhaps ... perhaps deflation will occur despite the government printing money, because the printing money exit strategy has been tried before. The central problem is that you can't force people to spend. So if you print money and throw it out of helicopters, people will save it unless you fiscally hold a gun to their heads. In other words - it doesn't work and people still hoard their money.
The danger is that an incompetent government might try all sorts of fiscally insane measures in the name of trying to prevent defaltion which will actually make it worse.
The current zero interest rate and weak pound are just those - they serve only to diminish government debt at everyone else's expense.
6. last_days_of_disco said...
@drewster
I think you are painting a accurate picture. Think about it. The UK is not an economic power house, its all hubris. The English are perhaps slightly more descent than some groups but that is not convertible into ten times the wealth of everyone else. Hence as the ridiculous bubble unwinds we are going to find ourselves rapidly rejoining reality. Basically Britain is a third rate producer with weak industry and expensive labour. Once reality bites, we will have to accept that we will need to live on what Britain produces not everyone else.
Its a big fall after the hallicon days but the fact is Britain can still be great in lots of ways without this crack fueled finance sector.
7. harold said...
Paul, I suspect the logic of your argument falls down because of the size of the public sector in the UK, which is absolutely huge. Basically, this gives the government the leeway to relax pay awards upwards - GB knows what the public will do... circulate their newfound 'wealth' by spending.
8. paul said...
harold, I can see where you're coming from, but that would require another public sector spending binge which will make the blowout of 2002-2005 look like a corner shop outing. Can you see that happening? Can't you just see the headlines? "Public sector fills its boots while Britain gets poorer". No, won't happen I don't think.
And even if it did, its still a zero sum game - the government has to repay what it spends, or rather justify why it is spending and besides public sector employees would just use the extra income to pay down more of their debt, hence it doesn't get spent, hence back to square one. That's the other reason why it won't happen - basically it won't work.
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