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?