Friday, Sep 04, 2009
Sounds like interest rate will be on the way up very soon...
Yahoo: Risk of eurozone deflation has gone: ECB economist
The risk of deflation in the 16-nation eurozone has disappeared, the European Central Bank's chief economist Juergen Stark said on Friday.
Posted by mark @ 10:01 AM (669 views) Add Comment
9 Comments
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1. uncle tom said...
"could spiral into deflation, which stomps on economic activity because consumers and businesses wait for prices to fall even more"
This little mantra has been doing the rounds of late..
..but is it true?
If the price of a product is perceived to be falling rapidly, and in particular, falling relative to other prices; then there is an obvious reluctance to buy more than is needed for immediate use.
But if all prices are falling, or if the fall in price is very small - a few percent each year - does than dissuade people from spending? I don't think it does.
Insecurity, both among consumers and businesses; is the real deterrent to spending.
2. paul said...
UT, I think this is more complex and has much more to do with counting methods.
The European-favoured Counsumer Price Index measures the price of consumables - favouring goods that are wholly consumed rather than asset classes. Deflation here will not have an impact on expectations unless you are able to hibernate and not consume any food in order to benefit from any price falls.
The RPI includes housing which is falling (okay right now we have a slight jump, but it is a jump on a downward escalator) but won't be included in the stats. So central banks are in a dilemma of their own making (especially the Bank of England). In shifting away from RPI towards CPI, they've limited the action they can take to address falling RPI and rising (or static) CPI.
So the headline rate of inflation will be reasonably constant (CPI), but the cost of everything else will fall as it did in Japan, and its the cost of these things that people adjust their purchasing decisions on - cars, houses, LCD TVs, computers etc.
3. becky said...
Reading this has persuaded me to put my savings coming up for renewal into the 6 months measly rate account rather than the 1 year almost as measly rates account. And to think I managed to get nearly 6.5% a year ago.
4. Tom said...
Any interest rate increase will be bad news for Ireland!
5. uncle tom said...
Paul,
The BoE shifted its target measure from RPI to CPI because Brown told them to. He had probably been warned that RPI was likely to get awkward due to HPI - but used convergence with european measuring systems as his excuse for the switch.
As far as I know, the BoE never advocated the change.
The Tories have indicated that they favour a return to either RPI or RPIX for inflation targetting, (one document mentioned RPIX, but another strongly criticised the absence of housing costs as an error, which suggests RPI) and as they will almost certainly be in power in nine months time, it is reasonable to expect these are the measures that the BoE are now studying most closely.
Unfortunately, that means the BoE will feel under no pressure to raise rates at the moment, although I don't think the current level of RPIX makes a case for further QE..
6. jackas said...
Deflation is just a bogeyman to allow the central banks to justify printing more money for political ends.
We should have the right to delay purchases if we want to - It's our feckin money, we worked for it, and we should be allowed to save it. The central banks are modern day highwaymen.
7. happy mondays said...
@ 5 The central banks are modern day highwaymen. Then, let's hang'em !
@ 4 You are not suppose to be saving, you are committing a crime against the powers at be, by just doing that, go spend becky, buy a house, nether been a better time!
Our time will come..
8. Kp said...
@3 : instead of measly rate, buy a house and rent it out to yield 7%.
9. Smiling said...
@8
talks a lot of sense