What Deflation? What Inflation?
By Paul E. Erdman, CBS MarketWatch
Last Update: 5:12 PM ET Jun 15, 1999StockWatch
SAN FRANCISCO (CBS.MW) -- Remember Deflation? Just a few months ago some of the world's preeminent economists were warning that deflation would soon envelop the globe, with perilous consequences.
This had become inevitable, they said, due to the confluence of deflationary forces everywhere in the world. They included the crash of the Asian Tigers' economies, the never-ending recession in Japan, the slowdown of growth in Europe, the threat of a series of competitive devaluations in Latin America, the collapse of crude oil prices, gold at under $300 an ounce and still sinking. Taken together, all this would soon add up to something that the world had not experienced since the 1930's. The rest was left to our imagination.
Lest we get confused, let's define what we are talking about, especially the difference between disinflation and deflation. Disinflation is what the world, including the US, has been experiencing for years. It involves a decreasing rate of inflation, in our case down to + 1.5% per annum. Deflation involves an absolute decline in the general price level, i.e. to zero and then into negative territory.
So today how many countries suffer from deflation?
One country and one country only: Japan. Nobody else. Even there, if first quarter growth at the annual rate of 8 percent is a precursor of more to come, the period of price declines in Japan will soon end.
Looking at other key areas around the world, consensus forecasts compiled by the Economist magazine indicate that, in the pull of a very gradual recovery of the world economy, consumer prices in the Euro-11 will rise 1.2 percent in 1999 and 1.5 percent in 2,000; British prices will rise 2.0 percent this year, and 2.3 percent next: prices at the consumer level in the United States are forecast to rise 2.2 percent in 1999 and 2.1 percent in 2000.
What's the message here? That we always overdo things.
The fear of the rapid return of high rates of inflation triggered by the upward spike in the U.S. consumer price index in April, has already spooked the bond market.
Instead of the long bond yield sinking to 5 percent this year, and 4 percent next year as was being forecast just a couple of months ago, guess what: it's now over 6 percent. And all the presses have been stopped in anticipation of Wednesday's release of the CPI numbers for the month of May. Our financial fate hangs in balance, we are told.
Baloney. Wednesday will be a nonevent. The inflationists of today are as wrong as the deflationists of yesterday. We are "doomed" to continue to enjoy gently rising but still very low rates of inflation all around the world for quite a while. Sure, the Fed is going to raise rates, but it will be strictly a preemptive strike against what might, stress might, begin to happen a half year down the road.
So relax.
cbs.marketwatch.com |
