Why is Christine Lagarde creating fears about an “ogre of deflation”?

16th January 2014 by Shaun Richards

Yesterday saw a speech given by Christine Lagarde the Managing Director of the International Monetary Fund to the National Press Club in Washington DC. In it was a piece designed to be eye catching which I quote from below.

With inflation running below many central banks’ targets, we see rising risks of deflation, which could prove disastrous for the recovery. If inflation is the genie, then deflation is the ogre that must be fought decisively.

Actually she means disinflation or falling prices rather than deflation or falling aggregate demand. Perhaps her grasp of the issue is so confused she does not know the difference! However it is an illustration of the fear that surrounds global leaders at the first sniff of inflation being below target.

Indeed in the same speech, somewhat  typically for Mademoselle Lagarde, she contradicts herself as we are also told this.

Momentum strengthened in the latter half of 2013, and should strengthen further in 2014—largely due to improvements in the advanced economies.

Now that the global economy looks more stable,

Growth is certainly picking up in the United States, driven by private demand

The Euro Area is turning the corner from recession to recovery,

What about the low-income countries? Here, the news is generally good.

I should mention that I have just returned from the two most dynamic regions of the world—Asia and sub-Saharan Africa, which saw growth of 6½ percent and 5 percent last year respectively.

So the message here is similar to a few days ago when Mademoselle Lagarde “leaked” the upcoming IMF growth forecasts by telling us that they were going to get an upgrade. You may wonder about the complete change of tone between that and her new “ogre of deflation”.

As ever Christine Lagarde had time for a bit of personal back-slapping and trumpet blowing.

We have certainly avoided a worst case scenario during the crisis, thanks to the efforts of global policymakers over the past half decade.

Presumably she does not mean the disastrous so-called “shock and awe” policy that she and her fellow European finance ministers inflicted on Greece back in the spring of 2010!

Also some may miss the significance of this barbed comment.

This role will surely become more important with time……… That is why we need the continued support of our entire membership.

It is rather misleading as the US Congress has again failed to ratify the 2010 reform package which would convert some US $63 billion of loans into capital. Perhaps it is this move which has converted Christine Lagarde’s mood from outright optimism to worrying about ogres. Or of course the subject of the inevitable haircut/default on the loans to Greece may have been mentioned to her by someone.

Charles Evans joins in

Chicago Federal Reserve President Charles Evans has also been on the deflation (disinflation) stump.

Moreover, the recent news on inflation has not been good. Inflation is too low and is running well below the FOMC’s 2 percent target. This target is measured in terms of the price index for total personal consumption expenditures — or PCE — and this has increased less than 1 percent over the past year.

I know it sounds strange to many, but persistently too-low inflation is a problem that monetary policy needs to address.

If we combine the two views expressed above then it would appear that they have both been listening to Miley Cyrus and linked deflation to it.

I came in like a wrecking ball
Yeah, I just closed my eyes and swung
Left me crashing in a blazing fall
All you ever did was wreck me
Yeah, you, you wreck me
Yeah, you, you wreck me

The European Central Bank joins in too

From today’s monthly report.

Over the medium term underlying price pressures in the euro area are expected to remain subdued……. Such a constellation continues to suggest that the euro area economy may experience a prolonged period of low inflation

As previously stated, this expectation is based on an overall subdued outlook for inflation extending into the medium term, given the broad-based weakness of the economy and subdued monetary dynamics.

Much more coded as is the ECB’s want but it too is hinting at issues in this area.

Meanwhile in a place called reality

Let us start with the Euro area as it is in the most danger and the latest inflation report has this morning told us this.

Euro area  annual inflation was 0.8% in December 20132 , down from 0.9% in November

Euro area workers and consumers will be welcoming a slower rate of rise of prices in what for many are hard pressed times. Currently of the 18 nations three have a negative annual inflation rate (Greece,Cyprus and Latvia) and in the former two there is a clear danger of a downwards disinflation and deflation spiral.  But on the other side of the coin we were told this only yesterday.

In November 2013 compared with November 2012 , industrial production increased by 3.0% in both the euro area and the EU28.

So falling inflation in this instance was certainly not associated with the end of the economic world! Not yet anyway.

If we move to the United States we see that inflation on the Personal Consumption Expenditure measure used by the Federal Reserve is running at an annual rate of 0.9%. The more widely followed Consumer Price Index will report later and is expected to have risen from 1.2% to 1.5%. So as you can see US consumers and workers will be welcoming lower inflation rather than waking at night in a cold sweat.

If we look at the UK then the recent disinflationary pressures have put it in a temporary situation which is “just right” in Goldiluck’s porridge terms. However even such  thoughts require a type of amnesia as inflation has just spent the last four years overshooting its target  by a total of around 6%.

Even inflation in Japan has been edging away from zero. Although Japanese consumers will of course view this much less favourably than Charles Evans and Christine Lagarde. Japanese workers will like this move even less as it has pushed real wages further downwards as we wonder if this the real objective they have. Although presumably not for themselves.

What about symmetry?

Whenver there are inflation fears we are told by those in authority not to worry as it will be temporary or some other such version. Can you notice the difference in their approach to its doppelganger of disinflation? They are in an immediate rush to raise fears about it and so confuse themselves they teleport to an apparent world where falling prices is combined with falling output or what I call DEFLATION (the capitals are deliberate) or an echo of the great depression of the 1930s.

A major factor in their panic is the fear about what would happen to debt levels in such a situation. Of course Christine Lagarde has some skin in this game via the policies she supported in Greece which looks as though it is on course to live through her worst fears. As I pointed out earlier I believe that inflation is wanted by these officials so that (others) real wages can be cut in a stealthy and hidden fashion.


Occassionally a bit like Skynet in the Terminator series of films these people can become self-aware as this from the speech from Charles Evans illustrates.

When I state the facts about U.S. inflation, some people look at me like I’m from Mars and question my grasp of reality,

I suspect it is probably more than some people as many are likely to be demonstrating politeness. Unfortunately this is followed by more scaremongering.

Persistently undershooting our 2 percent target is costly.

What Mr.Evans fails to tell us is what is so wrong with US inflation remaining stable at 1% per annum? I note that a comment to today’s Financial Times would welcome such a world.

Appreciation of my money and cheaper prices? Bring it on. The prudent have been royally shafted so far by government and the imprudent. I’d welcome some mild deflation personally

Indeed the derison goes on in other replies.

I fail to see how increasing energy prices – a prime success of QE – is of any help to the poor.

For the prudent, deflation is to be welcomed. For the imprudent it is an ogre.

How wonderful that medical costs, housing prices, cable TV rates, college costs, auto repair costs, restaurant prices, government fees, rents, and stock prices are set to go down here in the major population centers of the US.

Later in his speech Charles Evans confirms that he wants the economy to be a rigged game with one side always winning.

 For example, households take on debt expecting that their income will be adequate to cover monthly payments. If inflation is surprisingly low, wage increases and other income gains are more likely to fall short of these expectations, and interest and principal payments will be more burdensome than what was planned for. A similar story will hold for business borrowing.

There is a lot wrong with that as for example it is wages that have led downwards well ahead of inflation especially in the UK. Mind you Charles seems very ill-informed about the UK.

Inflation has fallen quite low in the…… United Kingdom.

Er it has been above target for four years Charles and has only been on target for one month! Apparently this is “quite low” and to an inflationaholic of course it probably is.

In essence we are seeing what I feared from the beginning of the crisis where any inflatinary pressure will be ignored as it is “temporary”. But the other side of the coin is met with panic as the goalposts are rapidly shifted. Many would welcome low inflation and if we can see some growth too would regard that as something of a porridge which if nots “just right” is better than many alternatives. That is not how it is being presented though is it?

Oh and what about asset prices? There is no sign of deflation there. Will they be ignored?






11 thoughts on “Why is Christine Lagarde creating fears about an “ogre of deflation”?”

  1. forbin says:

    Hello Shaun ,

    Never confuse whats good for the Banks with whats good for the People


  2. GusBmth says:

    Hi Shaun
    Is the 2% inflation target an evidence-based target, or one which was chosen because it sounds good? One might be surprised that a target derived from a sophisticated analysis of economic history would be the same round figure for so many different economies around the world.

    I feel like I live in a parallel universe. When my window cleaner recently increased his rate by 50p or 5.26% citing the ‘increase in prices’, I thought ‘prices are up 4 to 5%’ so it seems like a fair increase. But apparently, Charles Evans, a member of the FOMC, can weave the UK experience into a disinflationary narrative.. I would offer an alternative one – the UK has had a poor inflation record for decades, relative to more successful economies like Germany and it still has. Manipulating official statistics downwards doesn’t deal with the actual problem,but does lead to perverse monetary policy decisions.

    1. Anonymous says:

      Hi Gus

      Inflation targeting started at the Reserve Bank of New Zealand but it was a 0% to 2% range. If the Fed and ECB had that right now few would be beating the deflation drum in the way that they are! It was the Bank of Canada if I recall correctly which first aimed at 2%. However at that time aiming at 2% was usually done from a higher inflation rate for example in the preceding period core inflation had been over 5% in 1989 and just under it in 1990.

      Indeed they intended in the original documentation to eventually take it down to nearer zero.

      “Thereafter the objective would be further reductions in
      inflation until price stability is achieved. A good deal of.
      work has already been done in Canada on what stability in
      the broad level of prices means operationally. This work
      suggests a rale of increase in consumer prices that is clearly
      below 2 per cent”

      So they back then did not think of 2% as being a magic number…

      Indeed Ben Bernanke (whatever happened to him?) wrote a paper making suggestions for inflation targeting at the Fed which does not mention any number.

      On the subject of inflation experience I was sent this earlier today about what has been happening in Ireland.

      davidmcwilliams.ie/2014/01/16/prices-are-up-wages-cant-keep-up-and-were-getting-poorer-by-the-day …

      1. Anonymous says:

        Shaun, I am always impressed by the depth of your knowledge. As you say, when the 2% inflation target was first introduced it was only to be an intermediate target, with unspecified lower targets ahead. As Chuck Freedman, a former senior BoC official, noted in “Reflections on Bank of Canada Monetary Policy over the Last Thirty Years”: “…in late 1973 then-Governor John Crow withdrew his name from consideration for a second term as governor because the newly elected government was not prepared to agree to a policy in which there would be a decline in the net inflation targets agreement on the direction of price stability”.

        In March StatCan went to a policy of updating expenditure weights every two years instead of every four years (actually every four, five or six years, as StatCan never stuck consistently to its policy of four-year updates that began in 1982). There is also a nebulous commitment to updating the basket every year, i.e. the same policy implemented in the UK Retail Price Index since 1962, and it will no doubt be trumpeted as a cutting-edge methodology change when it finally happens. Since the increased frequency of basket updates reduces the upper level substitution bias in measured inflation, if there is no reduction in the target rate below 2% then there is, other things being equal, a loosening of monetary policy. One would think there would therefore be some pressure on the Bank of Canada and the Department of Finance to lower the target inflation rate from the inflation-adverse segment of the population, but it hasn’t really happened yet. Andrew Baldwin

  3. forbin says:

    I guess that if my money in my pocket does ever get to appreciate then to afford things like cars and iphones I can just save .

    if it appreciates quicky then I dont have to save for long before being able to buy .

    then I don’t need a savings account or a bank to get a loan from ……

    ah I see the problem!


    PS: also government debt and private debt will be more difficult to pay off ? why? True the value it represents will increase but then again so will the tax take that is used to pay it off. Same with you wages you can afford to pay off the debt as you need less money to pay for cost of living.

    Its just that the Banks will be hurt more – who will get paid bonuses in that scenario ? after all I won’t need so many loans……

    1. Anonymous says:

      Hi Forbin

      I think that the issue with public debt is foremost in many of these people’s minds. After all Christine Lagarde was finance minister of France and imposed a debt based (non) solution on Greece. Of course the debt dynamics in Greece look dreadful.

      Remember lower inflation reduces the tax take through lower fiscal drag.

  4. Alex says:

    “Occassionally a bit like Skynet in the Terminator series of films these people can become self-aware”…..rolling around laughing my head off! Top comment :)

    1. Anonymous says:

      Hi Alex,thanks and welcome to my part of the blogosphere

      Sadly unlike Skynet they usually find self-awareness to be a very temporary condition…

  5. Anonymous says:

    Why do we have so many idiotic self-professed experts running the economies? Is it a reality game show for the top 0.1% ??

  6. therrawbuzzin says:

    No inflation, no underhand impoverishment of the workers.

  7. Anonymous says:

    It would be beneficial if the US congress could enforce some sort of accountability on Lagarde & the European bailout that helped many French banks exposed to a Greek default

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