Disinflation

7 Key excerpts on "Disinflation"

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  eBook - PDF

  Inflation

  History and Measurement

  • Robert O'Neill, Jeff Ralph, Paul A. Smith(Authors)
  • 2017(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  Alongside the definition of inflation, we will also often hear econo- mists make use of the term deflation which the OED defines as a reduc- tion in the level of prices in an economy. 3 This refers to periods of time in which the level of prices, however measured, is declining, rather than increasing as is the more common situation in modern economies. This definition of deflation can cause some confusion for students of Index Numbers as deflation can also be used to refer to the practice of divid- ing a series of values measured in nominal 4 money at different periods of time by one plus the percentage change in a price index measured as a decimal so that the effect of changes in the price level between the peri- ods is removed and the amounts are measured at a constant price level. Where there is any ambiguity in the course of this book, we will attempt to clarify our meaning in the context of the situation being discussed. Economists will often also make reference to a period of Disinflation which represents a period in which inflation is falling from a previous level to a new lower level (for an example of this being used in context see 3 Surprisingly, the definition seems incomplete compared the earlier statement referring to infla- tion. However, deflation might also be defined as an increase in the purchasing power of money. 4 By this we mean the amounts measured in money in the time period they occur, so for example, company accounts are stated in nominal amounts, and the value of the pounds values are meas- ured in changes across the years due to inflation. 24 R. O’Neill et al. Roger 2009). For example, in the past three decades, the UK has expe- rienced a period of Disinflation as inflation has fallen to a relatively very small, but generally positive, level.

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  eBook - PDF

  The Reform of Macroeconomic Policy

  From Stagflation to Low or Zero Inflation

  • J. Perkins(Author)
  • 2016(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  But the term ‘deflation’ has usually been employed in the past by economists to mean a fall in output or employment. It is true that in the 1930s falling prices often accompanied a contraction of output and employment. But there is no presumption that this will 180 The Reform of Macroeconomic Policy be the normal course of events. Indeed, unless these two uses of the term ‘deflation’ are kept separate there is a risk that a misconception will arise that they are inevitably associated with one another: that falling prices are always accompanied by falling output or employ- ment, and that falling employment or output cannot occur without falling prices. It is especially important to distinguish between these two possible uses of the term ‘deflation’ as very different policy meas- ures will be required to deal with falling output or employment accompanied by inflation from those that will be required for a situ- ation of falling (or low) inflation combined with constant or rising employment or output. (There have been a few cases of the term ‘disinflation’ being used to mean ‘a situation of falling prices’. But that term was coined to mean simply ‘the reduction or elimination of inflation’; and it does not, therefore, seem desirable to extend its meaning in that way.) In what follows, therefore, the term ‘negative inflation’ will be used to mean ‘a falling price level’. The term ‘deflation’ will be reserved to mean ‘a contraction of output or employment’ – at least relative to potential. Measured inflation and actual inflation In a situation of low inflation, and with many central banks being committed to achieving the objective of ‘price stability’, there may well be periods where the general price level is actually falling. For if the central banks are successful in achieving something close to price sta- bility over a period, it would imply that the general level of prices will be falling about as much and as often as it will be rising.

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  eBook - ePub

  The Coming Bond Market Collapse

  How to Survive the Demise of the U.S. Debt Market

  • Michael G. Pento(Author)
  • 2013(Publication Date)
  • Wiley

    (Publisher)

  stable means not easily moved. However, to the men and women who control our money supply, it means increasing about 2 percent a year. So determined are they that the economy not be met by the evil deflationary monster that they create inflation of 2 percent (as measured by the phoniest of inflation measurements known as the Personal Consumption Expenditure Price Index). This is done as a buffer or wall to block evil deflation from coming in—because once that evil deflation monster enters the economy, they fear he will never leave.

  The word deflation is a little nebulous in that it is used by economists in a technical way to describe a decline in the money supply. Most laypeople view deflation as a generalized decline in prices. Inflation , in turn, would refer to an increase in prices or, more technically speaking, an increase in the money supply or the fear of such a future increase in its supply that causes a decline in the purchasing power of the currency.

  As a follow-up to my introduction on decreasing prices, I have decided to start my critique of Fed myths with the Keynesian Fed-lore of the “deflationary death spiral”; this Fed-lore is very widely held and promulgated. The men and women at the Federal Reserve believe that a slight increase in prices is a sign of a growing economy and falling prices are devastating.

  Let’s put this Keynesian Fed-lore to the test and see how it holds up.

  In an economic environment of increasing productivity accompanied by a static money supply, one would assume that prices would slightly decrease. As an industry becomes more productive and makes better use of technology, those technological advances aid in the reduction of costs associated with producing the product. Profit margins improve, and in a competitive environment, businesses will pass most of these savings on to consumers. So with truly stable prices, the costs of many items would go down, and that would be a positive result; it would indicate that businesses were leveraging productivity to increase profit margins and decreasing the price of goods to consumers. However, outside of technology, we rarely see this materialize.

  Those at the Fed view any deflation as harmful, regardless of the cause. Ben Bernanke has said that “deflation is in almost all cases a side effect of a collapse in aggregate demand—a drop in spending so severe that producers must cut prices on an ongoing basis in order to find buyers.”1

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  eBook - ePub

  Quantitative Easing As A Highway To Hyperinflation

  • Imad A Moosa(Author)
  • 2013(Publication Date)
  • WSPC

    (Publisher)

  Chapter 1

  INFLATION, DEFLATION, Disinflation AND ALL THAT

  1.1.What is Inflation?

  It is often said that inflation is inevitable, like death and taxes. This is probably because, as Sir Frederick Keith-Ross mentions, “inflation is like sin; every government denounces it and every government practices it” (Makochekanwa, 2007). Historical stories about inflationary episodes proves that it is a phenomenon that has existed ever since money was used as a medium of exchange. Inflation is a topic that receives significant attention in the media, with regular features, reports and interviews. It is an issue that is often debated by politicians in Parliament and election campaigns, let alone economists and business executives.

  The reason why inflation is treated with “respect” is that it affects everybody in various ways. It is an important consideration during mortgage payments and in determining the cost of essential goods and services required for survival and those that make our lives more pleasant. We anticipate news about whether the central bank will decide to cut or raise interest rates, with inflation typically being the prime consideration (at least for some central banks). Most of us are fascinated by documentaries on the great inflation in Germany during the 1920s and how it relates to the rise of Adolf Hitler. Inflation has broad implications for the state of the economy and whether or not we can keep our jobs or find new ones. While it is regarded as one of the four macroeconomic variables closely monitored by policymakers (the others being growth, employment and the balance of payments), it is often the prime indicator that triggers drastic policy actions. “Inflation targeting” is a more common concept than “output targeting”, “employment targeting” or “balance of payments targeting”.

  Inflation is defined in different ways, but, in general, the phenomenon is about rising prices of goods and services (hence, the cost of living). As the prices of goods and services rise, the value (or purchasing power) of money falls in the sense that a monetary unit (say a dollar) buys less and less goods and services resulting in a diminishing basket. This is why inflation is viewed as a “persistent” erosion of the value of the money. While it cost 60 pounds to purchase a first class ticket on the Titanic in 1912, there is no way these days that this amount can buy a ticket to cross the Atlantic (let alone the Pacific) in a first class cabin on an ocean liner (perhaps 10,000 pounds can do the job). It is for this reason that we give our children more pocket money than what our parents gave us. People are typically nostalgic to the “good old days” when things were very cheap — the culprit being inflation.

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  No longer available |Learn more

  Textbook of Macroeconomics

  • (Author)
  • 2014(Publication Date)
  • White Word Publications

    (Publisher)

  ____________________ WORLD TECHNOLOGIES ____________________ Chapter-7 Inflation In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy. A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the Consumer Price Index) over time. Inflation's effects on an economy are various and can be simultaneously positive and negative. Negative effects of inflation include a decrease in the real value of money and other monetary items over time, uncertainty over future inflation may discourage investment and savings, and high inflation may lead to shortages of goods if consumers begin hoarding out of concern that prices will increase in the future. Positive effects include ensuring central banks can adjust nominal interest rates (intended to mitigate recessions), and encouraging investment in non-monetary capital projects. Economists generally agree that high rates of inflation and hyperinflation are caused by an excessive growth of the money supply. Views on which factors determine low to moderate rates of inflation are more varied. Low or moderate inflation may be attributed to fluctuations in real demand for goods and services, or changes in available supplies such as during scarcities, as well as to growth in the money supply. However, the consensus view is that a long sustained period of inflation is caused by money supply growing faster than the rate of economic growth. Today, most mainstream economists favor a low, steady rate of inflation.

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  eBook - ePub

  The Age of Deleveraging

  Investment Strategies for a Decade of Slow Growth and Deflation

  • A. Gary Shilling(Author)
  • 2010(Publication Date)
  • Wiley

    (Publisher)

  Figure 8.2 ).

  In any event, when the nation is not at war—a shooting war, a cold war, or the War on Terror—deflation is the norm as government spending in relation to gross domestic product (GDP) drops back. During those times, the productive capability of the nation, and now the world with globalization, is so great that supply chronically exceeds demand. That's what I believe lies ahead, assuming that the War on Terror will be wound down and not escalate into Cold War dimensions. That implies that deflation will reign until the next major war or some similar event. And unfortunately, unless human nature suddenly changes, there's another war out there in future years, waiting for us in the underbrush.

  Seven Varieties of Inflation/Deflation

  When we talk about inflation or deflation, we usually mean what is measured by the CPI, producer price index (PPI), GDP deflator, or other measures of aggregate price movements. I've identified, however, seven varieties of inflation/deflation that need to be kept in mind:

  1. Commodity

  2. Wage-price

  3. Financial asset

  4. Tangible asset

  5. Currency

  6. Inflation by fiat

  7. Goods and services

  Commodity Inflation/Deflation

  In the late 1960s, the mushrooming costs of the Vietnam War and the Great Society programs in an already-robust economy created a tremendous gap between supply and demand in many areas. The history of low inflation rates for goods and services (we'll call it CPI inflation for short) in the late 1950s and early 1960s apparently created a momentum of low-price advances that held CPI inflation in check until about 1973 (Figure 1.5 ). But by the early 1970s, commodity prices started to leap (see Figure 8.3

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  eBook - ePub

  Economics, Politics and the Age of Inflation

  • Paul Mattick(Author)
  • 2017(Publication Date)
  • Taylor & Francis

    (Publisher)

  2 Deflationary Inflation

  It is popular nowadays to distinguish between the inflation of time past and a new kind of inflation, which accordingly requires a new explanation, although in its monetary aspects inflation has the same features now as before: rising prices or the diminishing buying power of money. While its opposite, deflation, was viewed as contracted demand resulting in falling prices, inflation was explained by insufficient supply, driving prices up. Since, however, in this view it is the commodity market that determines price formation, little attention was paid to monetary policy. Money was seen merely as a veil concealing real processes, obfuscating them but altering little in their essential nature.

  This theory was also accompanied by the illusion, still lingering today, that the quantity of money in circulation in the economy has an important influence on commodity prices and that price stability depends on an equilibrium between the quantity of money and the total volume of goods. The modern advocates of the quantity theory of money also attribute deflation and inflation to a too slow or too rapid growth in the supply of money, and as a remedy to these anomalies they propose the creation of money adjusted proportionally to actual economic growth.

  Thus in money theory the economic cycle is represented as an expansion and contraction of the money supply and of credit not commensurate with the real situation. But it was expected that the equilibrium mechanism of the market would ultimately steer things back to normal. The crisis of the thirties, however, which seemed to have taken hold for good, put an end once and for all to any notions of such an automatic self-establishing equilibrium. In Keynes's view, which dominated bourgeois economic theory in the years that followed, the laws of the market were no longer capable of bringing about economic equilibrium with full employment. A developed capitalist economy, claimed Keynes, made for a decline in effective demand and with it a fall-off in investments and growing unemployment. Although this theory was designed specifically to explain economic stagnation during the period between the two world wars, it was quickly given universal status and regarded as the last word in the science of economics; to avoid the deflationary state of the depression and to restore economic equilibrium with full employment, state measures were needed to stimulate overall demand.

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