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To: Alex who wrote (23928)	12/8/1998 6:05:00 PM
From: goldsnow	Read Replies (2) \| Respond to of 116764

As oil slides, Europe debates deflation risk 11:11 a.m. Dec 08, 1998 Eastern By Alan Wheatley, European Economics Correspondent LONDON, Dec 8 (Reuters) - The year is ending as it began, with the world's top central bankers confronting the spectre of a destructive downward spiral in prices. The president of the European Central Bank (ECB), Wim Duisenberg, on Tuesday played down the risk of deflation, just as U.S. Federal Reserve Chairman Alan Greenspan did in an important speech in Chicago on January 3. Speaking to a European Parliament committee in Brussels, Duisenberg acknowledged that the Harmonised Index of Consumer Prices used by the ECB might overstate inflation in the 11-nation euro zone. It was just 1.0 percent in October. But he added: ''We see no risk of that developing into an inflation figure that might be called deflationary.'' Some economists are not so sure, and with statistics signalling a marked slowdown in growth they said Duisenberg's remarks at the very least showed inflation should be the least of the ECB's concerns as it nurses the European Union's new-born single currency, the euro, next year. Mike Waterson, chairman of NTC Research Ltd, said surveys of purchasing managers compiled by his firm across Europe showed that the continent was heading rapidly into recession. With official retail price indices overstating inflation by as much as one percentage point, Europe was arguably already suffering from deflation, Waterson told Reuters Television. ''The facts are that we are in a situation where price deflation is now quite common but asset price inflation is still rampant worldwide,'' he said. The threat of deflation has emerged because Asia'a economic crisis has left the world awash with unwanted goods. Prices of everything from metals to microchips have fallen. Whereas low inflation gives savers, investors and businesses confidence to plan for the future, falling prices chill economic activity as buyers hold back anticipating ever better bargains. As Greenspan put it: ''Both rapid or variable inflation and deflation can lead to a state of fear and uncertainty that is associated with significant increases in risk premiums and corresponding shortfalls in economic activity.'' Nowhere is the ebbing of inflationary pressures more dramatically illustrated than in the oil market. Weak demand, especially in Asia, has triggered a 40 percent drop in prices this year to a 22-year low of around $10 a barrel. The impact of cheaper oil varies from country to country depending on the taxes they impose. Moreover, industrial economies have cut oil use per unit of economic output by 40 percent since the OPEC cartel jacked up prices in 1973. Tim Congdon of Lombard Street Research in London estimates this year's drop in oil prices has reduced inflation in the industrialised world by at least half a percentage point. With oil likely to rise rather than fall further, labour bottlenecks in the service sector and industries such as computers and telecommunications growing strongly, Congdon does not share worries about a general decline in the price level. ''In the last 25 years we've been worried about inflation and it's been difficult to get inflation down. If there is a possibility of prices now falling we should celebrate because there's no constraint, if that's true, on central banks cutting interest rates very dramatically,'' he said. Stephen Lewis of London Bond Broking drew a different lesson from the slump in oil prices. ''That in itself may well create a fresh deflationary problem if it begins to undermine the value of oil-related loans in the financial system.'' He said incoming orders data pointed to a rapid cooling in output in Europe in the fourth quarter. ''It does seem that Europe is going over the edge here and is following Asia and other emerging countries towards depression,'' he said. After figures on Tuesday from Germany showing the first rise in unemployment in nearly a year, some economists are sure the ECB will follow up last week's euro-wide rate cut with another reduction in borrowing costs in the first half of next year. Duisenberg said the risk to growth in the euro zone was on the downside in 1999, but he said he expected the slowdown to be temporary and inflation to pick up to 1.6 percent on average from 1.2 percent this year. Even if the deflation bears prove to be right, Duisenberg said the ECB would not be panicked by a blip in price movements, either up or down. ''We would not react, policy wise, to short term deviations from...desirable levels of inflation. Both inflation or deflation would have to be persistently present. It's not one month's level we would react to,'' he said. Copyright 1998 Reuters Limited.