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Peston - Could 'good' Low Inflation Become 'bad' Deflation?

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http://www.bbc.co.uk/news/business-30795424

Gentle inflation is a spur to spend - because if you've got the money and you're not feeling gloomy, then you will spend today, because tomorrow prices might be a bit higher.

It is also a spur to borrow for investment, in a home if you are a household or in productive kit if you are a business, because if you think your earnings will at least rise in line with inflation, then the burden of your debt will diminish with passing years.

So moderate inflation tends to be associated with steady growth in national income - of the sort that should make us sustainably richer

That is why the government has set a target for the Bank of England of setting monetary conditions - through changes to the interest rate for lending to banks and via quantitative easing - to keep inflation at 2%, with a one percentage point margin of error on either side of 2%.

So with CPI inflation today announced at 0.5% for December - the joint lowest since records began in 1989 - the Bank of England has failed.

And for the first time ever it has failed because inflation is too low (it missed the target on the upside well over 30 times after 2007).

Pestons little propaganda piece to make us all fear deflation...

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He's a good little captured journalist. By not asking tough questions Peston gets to have prestigious interviews with important people like Mark Carney, they feed him little pre-approved scoops every now and then, and his ability to 'get the story' from the horse's mouth helps him secure promotions to top jobs like BBC Economics Editor.

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So with CPI inflation today announced at 0.5% for December - the joint lowest since records began in 1989 - the Bank of England has failed.

The bbc should make its mind up. On the news this afternoon they had a commentator on saying that 0.5% inflation was "Impressive". No mention then of the BoE's failure.

indeed a few years ago it would have been propagated as impressive but with the NuEconomics they're supposed to be trying to increase inflation.

BBC - Betting Both Consequences.

Edited by billybong

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Sigh.

I know, I know, but this is very significant , it is probably the basis of the whole economy.

Personally I think this is massive and we haven't really had the oil price reduction come through .

I think a lot of highly leveraged people and funds are going to get burned in all this, it may well lead to financial crisis the sequel.

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because if you think your earnings will at least rise in line with inflation, then the burden of your debt will diminish with passing years

New age economics. Keep repeating it enough and it will happen.

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From the bbc link


There are fears that endemic falling prices, or Japanese-style deflation, could become long-lasting and intractable in the eurozone.

And right now we in the UK are likely to ship in disinflation or downward pressure on prices from the eurozone - because the European Central Bank's determination to make money as cheap as possible means that the pound will go much further when buying goods and services priced in euros.

The point is that annual inflation of 0.5% here is not much of a buffer against deflation. And we've already seen three consecutive months in the UK of deflation in clothing and footwear, and almost no inflation in furniture.

Even so despite Japan's regular periods of deflation during the last 30/40 or so years the GDP per Capita in Japan's deflationary economy has been on average higher than in the UK's inflationary economy.

Edited by billybong

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The evidence suggests that deflation in consumer electronics seems to spur innovation and a desperate scramble to understand and meet customer needs first....in order to try and maintain margins.

Err no,its the only way they can sell more stuff, they either do that or die.

They have to persuade people to buy something they don't need, the people have to feel they can afford it.

Deflation and hence reduced profits will further tighten money supply.

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Surely a bbc man, a man of the people, means sh#ty inflation could become excellent deflation where your earnings and savings become worth more ever day?

Everything else would be nothing more than state funded propaganda. I refuse to fund the bbc any more.

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Err no,its the only way they can sell more stuff, they either do that or die.

They have to persuade people to buy something they don't need, the people have to feel they can afford it.

Deflation and hence reduced profits will further tighten money supply.

The chipsets get cheaper but the chip fabs and litho tools used to make them get exponentially more expensive. Since capital expansion is generally financed with debt, deflation adds continuously to the cost of manufacturing.

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Can someone tweet this bloke and ask if he has debt...i.e. benefits from inflation.

I have no debt so i benefit from GOOD deflation and have suffered at the hands of EVIL inflation for 5 years now.

If his article is based on his own v.i or that of his colleagues...he should be sacked.

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The chipsets get cheaper but the chip fabs and litho tools used to make them get exponentially more expensive. Since capital expansion is generally financed with debt, deflation adds continuously to the cost of manufacturing.

Interesting pov. My neighbour, who is an engineer at the local fab, has just been laid off due to lack of demand in their products at the moment. The fab makes smartphone chips I believe.

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Gentle inflation is a spur to spend - because if you've got the money and you're not feeling gloomy, then you will spend today, because tomorrow prices might be a bit higher.

It is also a spur to borrow for investment, in a home if you are a household or in productive kit if you are a business, because if you think your earnings will at least rise in line with inflation, then the burden of your debt will diminish with passing years.

This is the classic geek error- assuming that just because you yourself live and breathe a specialist subject that your narrow obsessions are shared by everyone else. Seriously, how many people in the real world walk around thinking that they really must buy that fridge today because due to inflation it might cost more in the future?

Not to mention that thanks to the Chinese and their slave army the price of consumer goods has been quietly deflating for years anyway- so any hypothetical muscle memory concerning the impact of inflation on prices has long since atrophied in the minds of the population.

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This is the classic geek error- assuming that just because you yourself live and breathe a specialist subject that your narrow obsessions are shared by everyone else. Seriously, how many people in the real world walk around thinking that they really must buy that fridge today because due to inflation it might cost more in the future?

Not to mention that thanks to the Chinese and their slave army the price of consumer goods has been quietly deflating for years anyway- so any hypothetical muscle memory concerning the impact of inflation on prices has long since atrophied in the minds of the population.

I don't think most people think about how much anything costs. If they want it they use a credit card without any thought at all.

Edited by LiveinHope

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The evidence suggests that deflation in consumer electronics seems to spur innovation and a desperate scramble to understand and meet customer needs first....in order to try and maintain margins.

Yeah, we couldn't let this happen with housing. Building house people want, at prices they can afford in areas they want to live in. Whatever next.

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I don't think most people think about how much anything costs. If they want it they use a credit card without any thought at all.

It's the monthly payment that counts, the fact it might be at 20%+apr is irrelevant,

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According to the BBC website George will be saying in a speech today that we shouldn't fear low inflation.

Well he would say that, wouldn't he. He knows perfectly well that most people's incomes are going to continue stagnating or decreasing - low inflation or deflation will mean they might feel the worsening in their standard of living less.

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Err no,its the only way they can sell more stuff, they either do that or die.

They have to persuade people to buy something they don't need, the people have to feel they can afford it.

Deflation and hence reduced profits will further tighten money supply.

In reality it doesnt work like that, lower IT and telecomms costs feeds into the entire supply chain of most businesses making it cheaper to produce everything, everybody wins. Lost pricing power is more than offset by reduced input costs. Lower costs (or more capability for the same cost) is a net gain for the economy: our total wealth is our total total output divided by population size - if we collectively produce more for the same effort, we are collectively wealthier.

Edited by goldbug9999

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So CPI doesn't matter as a target. Further if BOE are focused on wage growth and spare capacity why not does the ONS not declassify CPI as a national statistic ? There was an article the other day in the press on reform to the inflation statistics (RPI was declassified and I think CPIH was suspended due to errors in the calculation which some posters on here commented on)

Edited by Ash4781

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So CPI doesn't matter as a target. Further if BOE are focused on wage growth and spare capacity why not does the ONS not declassify CPI as a national statistic ? There was an article the other day in the press on reform to the inflation statistics.

http://www.telegraph.co.uk/finance/economics/11332063/Britain-should-abandon-current-inflation-measure-says-IFS-director.html

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