Deflation is spreading

Back in April, Mike wrote about the US entering deflation for the first time in half a century, noting a number of other countries that were also in deflation (see here). Since then, we’ve seen several more follow – the list now reads Ireland, Thailand, Malaysia, Taiwan, US, Japan, China, Belgium, Portugal, Hong Kong, Spain, Switzerland, Morocco, Canada, Sweden, Cyprus, France, Estonia, Finland, Slovenia, Germany, Singapore and Austria (in fact the Eurozone as a whole is in deflation).

The accompanying chart shows the latest CPI inflation rates in a selection of countries, along with the rate for the same time last year. It’s clear just how large some of the downward movements in CPI have been. This is partly due to base effects, such as the decline in oil prices from last summer’s highs, but also because of the amount of spare capacity that has been created in the global economy as a result of huge falls in economic output.  ‘Highlights’ from the chart include Ireland, where prices are falling at nearly 6 percent a year (perhaps we may soon see the Northern Irish heading south to shop instead of the other way around), and France and Germany, which are in deflation despite recently printing positive Q2 GDP numbers.

It’s also interesting to note that US CPI is lower than Japanese CPI.

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.

Categorised as: inflation

Discuss Article

  1. Anonymous says:

    There was a opinion piece on Bloomberg this week titled "Deflation Theory is a Hoax."

    He points out that deflation is a good thing. Who else but central bankers would complain that things are on sale. Lower prices allow prudent people without debt to enjoy their savings while over indebted people suffer until the market clears.

    Today home sales are up 7.2% year over year. We would probably all agree. Home sales are up because prices are lower.

    Deflation is allowing people who have been saving to get on the housing ladder.

    Meanwhile, central bankers are trying their best to confiscate those savings. First by printing more money. And then bailing out over indebted people with low interest rates.

    Thanks for the article.

    Posted on: 21/08/09 | 12:00 am
  2. Anonymous says:

    Could you please explain why the country with the 6th highest CPI out of 21 countries has the Bank Governor with most paranoia about deflation ?

    Posted on: 21/08/09 | 12:00 am
  3. William Ellis says:
    Posted on: 22/08/09 | 12:00 am
  4. William Ellis says:

    Another factor that may be contributing to the spreading deflation is the extraordinary degree of rigidity built into current exchange rate regimes. Apart from the pound sterling, none of the major world currencies has devalued against the US dollar over 2007/09; the Euro and Swiss Franc have marked time overall (despite fluctuations), and the yen has actually appreciated. Several other (mainly Asian currencies are tied to the US dollar eg Malaysia. Any fall in world commodity prices will therefore feed straight through to internal prices. This is particularly pertinent to members of the Euro zone. If the exchange rate cannot take the strain, then the impact will fall on internal price levels and/or unemployment. ( In the UK's case, the depreciation of sterling against other major currencies has clearly mitigated the impact of world deflationary forces). It will be interesting to see whether unity can be maintained within the Euro zone as the more robust economies(Germany, France) show signs of economic recovery, whilst the weaker economies(Spain, Ireland) languish. The early stages of economic recovery are always the most perilous for indebted countries (and companies).

    Posted on: 22/08/09 | 12:00 am

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