Deflation is Back In U.S. Business Sector
Federal Reserve must act decisively or risk following in Bank of Japan's
footsteps
TORONTO, Dec. 4 /PRNewswire-FirstCall/ - Deflation is back and the U.S.
Federal Reserve would be wise to pay it special attention or risk following in
the Bank of Japan's footsteps, says CIBC World Markets in its monthly
indicators report.
"While the Fed is refusing to publicly recognize it and most economists
are still skeptical of its existence, "Big D" is back, and this time deflation
is no longer solely in the domain of asset prices," said Jeff Rubin, Chief
Economist and Managing Director of CIBC World Markets. "For the first time in
nearly 50 years, private sector prices are falling in the U.S. economy."
While there is still a faint heartbeat of inflation in more closely
watched price barometers - the GDP deflator, which is the broadest measure of
prices in the economy, is still running slightly above zero and consumer price
inflation is running at 2% -- after stripping out government, housing and U.S.
business, prices are already heading lower.
Rubin says some of the warning signals evident today are the same that
the Bank of Japan faced in 1995. At the time, the Bank of Japan was confident
that extraordinary easings of rates would quickly rekindle demand, much the
same as today's markets seem supremely confident in the resuscitating power of
a 1.25% federal funds rate.
"The Bank of Japan waited far too long to aggressively respond to
deflation and didn't bring down interest rates to zero until consumer price
inflation had already become negative," says Rubin. "By that time it was
already too late and Japan has been struggling with a liquidity trap ever
since." The GDP deflator in Japan has been negative in six of the past seven
years and consumer price inflation has been negative for the last four years.
"The lesson for the Fed from Japan is to ignore the reassuring consensus
of economists and act pre-emptively," says Rubin. "For monetary stimulus to
work, interest rates must get to zero before inflation does."
A complete copy of the monthly indicators is attached.
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CIBC World Markets is a full service corporate and investment bank
throughout North America, with operations in Asia, Europe and Australia, and
serving more than 8,000 corporate, government and institutional clients.
CIBC World Markets' parent company is CIBC, one of North America's first
and largest financial institutions with offices in 18 countries, including the
world's major financial centers. A publicly traded financial services company,
CIBC has assets of US$180.9 billion and a market capitalization of almost
US$11.2 billion.
SOURCE CIBC World Markets |
