deflation

Ben McLannahan

“Inflation expectations appear to be rising on the whole.”

Check out the last 11 policy statements from the Bank of Japan: you’ll find the same line, an upgrade from a milder assertion about “some indicators” last July.

But according to the second round of the BoJ’s survey of companies’ expectations for price rises – the grand-sounding “inflation outlook of enterprises”, published on Wednesday – expectations are not rising. If anything, they’re falling. Read more

Claire Jones

January’s eurozone inflation number, out earlier on Monday, showed price pressures in the currency bloc are not quite as subdued as first feared, registering 0.8 per cent – a touch higher than Eurostat’s initial estimate of 0.7 per cent.

It’s hardly a game changer: inflation is still less than half the 2 per cent target. But the slightly better figure will reduce pressure on the European Central Bank a little after it faced renewed calls to ease policy following the release of the flash estimate.

However, the detail of this morning’s release suggest disinflationary pressures might be even worse than feared. This excellent chart from Marchel Alexandrovich of Jefferies International shows why: Read more

Several news outlets are reporting bullish overtones from Norway’s central bank, as it today kept rates on hold for the seventh month. The phrase they refer to is this: “the key policy rate should not be kept low for too long.”

This phrase was also used in October, however, and should not prejudice the reader against data on inflation and exchange rates that encourage a continued low rate. Norges Bank’s phrase might be to manage inflation expectations, or its definition of “too long” might simply be longer than that of the average journalist; but it would be quite odd if the central bank were to raise rates imminently. The bank itself says: “Both the consideration of bringing consumer price inflation up to target and the consideration of stabilising developments in output and employment imply a low key policy rate.”

Norway’s y-o-y inflation is 1.9 per cent, against a target of 2.5 per cent. It is projected to fall below 1 per cent before rising next year, with the outlying scenarios including deflation (see chart, right). Norges Bank is clearly worried about falling inflation. At the last monetary policy meeting in October, the Bank mentioned a fear that “financial imbalances … may trigger abrupt and sharp falls in output and inflation.” Read more

Robin Harding

All the papers at today’s Boston Fed conference on monetary policy have been fascinating but the last one of the day is the first one I’ve been free to concentrate on.

It was an fascinating – and extremely disturbing – paper on inflation dynamics by Jeff Fuhrer, Giovanni Olivei and Geoffrey Tootell of the Boston Fed.

To crudely, crudely summarise one of the most interesting conclusions they find that inflation is well modeled using expectations of inflation a year ahead and lagged inflation a year behind. Read more

Japan’s central bank has lowered its key rate from 0.1 per cent to a range of 0-0.1 per cent and will consider setting up an asset-purchase programme worth about $60bn to enhance monetary easing and achieve price stability.

The Asset Purchase Program is, at this point, a consideration rather than a promise: the Chairman has asked staff to examine the specifics and report back. For a consideration, it is quite well fleshed out, however:

The Bank will examine the new purchase of assets so that, principally, the outstanding balance of the total assets purchased will reach about 5 trillion yen after around one year from the start of the purchase, with about 3.5 trillion yen for long-term government bonds and treasury discount bills and about 1 trillion yen for CP, ABCP, and corporate bonds

 Read more

The Federal Open Market Committee meeting next Tuesday promises to be the most interesting for about 12 months, since the outcome is far from certain.

The recent slowdown in the US economy seems to have caused some members of the committee to soften their stance on monetary policy, and the markets have begun to speculate about a possible easing in policy. If this comes, it is likely to be very slight, since I doubt that the Fed has seen enough evidence yet to convince them that the economy is slowing in a dangerous way.

However, some members of the committee seem to be getting increasingly worried that the US may be about to fall into a deflationary trap, like the one which has affected Japan in the last decade. James Bullard, the president of the St Louis Fed, released a very interesting paper last week which analyses the Japanese precedent in some detail. Although he does not consider this the most likely development in the US, he does think that it is sufficiently probable to require contingency planning, in much the same way as the government might prepare for a terrorist attack which it hopes and expects will not happen. Read more

As expected, the Bank of Japan has held its key rate at 0.1 per cent and did not announce any new easing measures. But the Japanese economy is now forecast to grow at 2.6 per cent in the year to March 2011, up from April’s forecast of 1.8 per cent. The new forecast fits with yesterday’s estimate of 2.4 per cent from the IMF.

Deflation continues in Japan, and the BoJ response on this issue was: Read more

Lucid and frightening argument from George Soros, courtesy of New York Review of Books:

By insisting on pro-cyclical policies, Germany is endangering the European Union. I realize that this is a grave accusation but I am afraid it is justified.

To be sure, Germany cannot be blamed for wanting a strong currency and a balanced budget. But it can be blamed for imposing its predilection on other countries that have different needs and preferences—like Procrustes, who forced other people to lie in his bed and stretched them or cut off their legs to make them fit. The Procrustes bed being inflicted on the eurozone is called deflation.

Unfortunately Germany does not realize what it is doing. It has no desire to impose its will on Europe; all it wants to do is to maintain its competitiveness and avoid becoming the deep pocket for the rest of Europe. But as the strongest and most creditworthy country, it is in the driver’s seat. As a result Germany objectively determines the financial and macroeconomic policies of the eurozone without being subjectively aware of it. When all the member countries try to be like Germany they are bound to send the eurozone into a deflationary spiral.

 Read more

Might the Fed cap long-dated Treasury yields? This suggestion, made by Bernanke himself in 2002, has resurfaced in the blogosphere amid rising fears of deflation.

In recent days, the Washington Post’s Neil Irwin and the New York Times’ Paul Krugman have both asked what the Fed can usefully do if there is another slowdown. The meticulous Bill McBride, the man behind Calculated Risk blog, offers an insight into Bernanke’s ‘roadmap’. The speech might be old, but the thinking seems more relevant than ever.

Over to Bernanke:

So what then might the Fed do if its target interest rate, the overnight federal funds rate, fell to zero? One relatively straightforward extension of current procedures would be to try to stimulate spending by lowering rates further out along the Treasury term structure–that is, rates on government bonds of longer maturities.

There are at least two ways of bringing down longer-term rates, which are complementary and could be employed separately or in combination.

 Read more

James Politi

The latest warning on the fate of the global economic recovery today came from the International Monetary Fund, which rather ominously stated that the risks of a slowdown have risen considerably in recent months.

In that context, I came across a fascinating – and worrying - note by John Makin, a visiting scholar at the American Enterprise Institute, a Washington think-tank, and former consultant to the Treasury department.

Mr Makin, who is also a partner at Caxton, the hedge fund, is firmly in the camp of economists who believe deflation is emerging as the biggest danger to the economic recovery, and he eloquently lays out his case.  Read more

James Politi

The doves on the Federal Open Market Committee already have plenty of ammunition to argue against any early rate hikes or asset sales, given the slowdown in the economic recovery. But they have acquired an additional weapon with the release of the Institute for Supply Management’s monthly surveys on business activity in the services and manufacturing sectors.

Both the ISM services survey, released today, and the ISM manufacturing survey, released last Thursday, disappointed forecasters, revealing bigger-than-expected drops in activity. But that’s not all. The ‘price’ component of both surveys were sharply lower – a very concrete sign that disinflationary pressures are accelerating across the US economy.

The manufacturing ISM showed the prices index down from 77.5 to 57, while the services survey’s price index fell from 60.6 in May to 53.8 in June. Let’s not forget that core inflation -  as measured by the labor department’s consumer price index excluding food and energy – rose by 0.9 per cent in the year to May - its slowest pace since 1966 and well below the Fed’s target of about 2 per cent.

Of course, the ISM price indices include Read more

Simone Baribeau

The monthly inflation/deflation fight is still alive and well, with the deflation side striking a blow after today’s US CPI numbers showed year over year inflation rise only 0.9 per cent.

“Core inflation continued to decelerate in April resulting in the smallest year over year advance in the index since 1966,” wrote Joseph Brusuelas of Brusuelas Analytics. “Pricing developments have set the stage for further declines in core pricing throughout the remainder of this year.” Read more

Robin Harding

Current policy rate: 0.1%
Consensus expectation: steady at 0.1% (Bloomberg, 14 economists)
Taylor rule policy: -3.3%
Headline consumer price index: -1.1% (March)
Inflation objective: 0 to 2%

Notable special measures in operation
• Y20,000bn in 0.1 per cent loans for a three-month term
• US dollar auctions, amount unlimited, 84-day term Read more

Robin Harding

The Bank of Japan is not going to let the government foist an explicit inflation target on it without a fight. In a fascinating speech given in New York yesterday BoJ governor Masaaki Shirakawa argues that inflation targets are one reason that central banks allowed asset price bubbles to develop. For good measure he suggests that the world learned the wrong lessons from Japan’s deflation – and implies that US monetary policy in the 2000s was too loose as a result.

Mr Shirakawa’s argument:

Second, some political, economic and social dynamics influenced central bankers, and it became difficult for them to conduct monetary policy based on factors other than the inflation rate. This mechanism is quite subtle. The logic that price stability is a precondition for economic stability and that the independence of the central bank is necessary for price stability, became gradually but firmly established in the 1990s. At the same time, the granting of independence naturally called for the strengthening of accountability. An easily identifiable benchmark was desired. The framework which best fulfilled such needs was inflation targeting. However, under an inflation targeting regime, the debate tends to center on the relationship between the target inflation rate and the actual or expected inflation rate.

As a result, the cost of justifying adjustments in monetary policy becomes quite high in the eyes of central bankers, when such adjustments are aimed to deal with imbalances which appear in forms other than price indices. Economists focused their attention to the linkage between the output gap and the inflation rate, while awareness toward financial imbalances was limited.

 Read more

Robin Harding

A little more interest from the back-and-forth about deflation that regularly attends hearings of the finance committee of Japan’s lower house. According to Bloomberg/BusinessWeek:

“I think inflation targeting is an attractive policy,” [finance minister Naoto Kan] said at parliament in Tokyo today. “We could have a goal of 1 percent or something a little higher, like 2 percent, and work with the BOJ until that goal is met.”

That takes Mr Kan a little closer to substantive disagreement with the BOJ. The BOJ is (a) opposed to an explicit inflation target and (b) happy with its existing ‘understanding of price stability’ of a 0-2 per cent positive range centred on 1 per cent. Read more

Robin Harding

Is there anything interesting to say about today’s predictable and expected Bank of Japan decision to do nothing?

Errr, I draw your attention to footnote two of the statement. Read more

Robin Harding

Leave aside for a moment the question of whether you think deflation is a crucial economic problem for Japan (I do but I recognise that others don’t). One of the most frustrating things about the debate is that no one will join up the different policies that would be needed to end it.

Here’s financial services minister Shizuka Kamei via Bloomberg/BusinessWeek:

Japanese Financial Services Minister Shizuka Kamei called for stimulus spending of at least 11 trillion yen ($117 billion) to rid the country of deflation. “Japan’s economy is not at the stage where it has a strong recovery that can pull the nation out of this deflationary spiral,” Kamei said at a news conference in Tokyo today. “Immediate implementation of this year’s budget alone isn’t sufficient.”

So Mr Kamei thinks that if the government spent enough money deflation would get better (Mr Kamei tends to think this will solve a lot of problems).

Here is finance minister Naoto Kan via Xinhua:

“Of course, we understand that each organisation is independent, ” Kan said at a news conference. “But at the same time the BOJ and the government have in a way been united, particularly in connection with addressing deflation.”

Mr Kan is always keen to co-opt the BOJ and paint it as solely responsible for deflation, fixing it at the government’s behest. All the government and the BOJ are really united on is their belief that ending deflation is the other side’s job. The government would like aggressive monetary policy from the BOJ; the BOJ would like structural reform from the government.

To demonstrate that, here is BOJ governor Masaaki Shirakawa in his January speechRead more

Robin Harding

Japan’s finance minister, Naoto Kan, wants to escape the country’s persistent deflation by the end of the year, according to Reuters.

“Escaping deflation is difficult so we won’t see an immediate improvement such as in several months. But taking two to three years would be too long. Hopefully, we want Japan to see prices turn positive by the end of this year,” Kan told a lower house financial committee. Read more

Robin Harding

The Wall Street Journal’s editorial page has weighed in with its view on how to stop Japan’s deflation, and like the FT’s Lex, they are in sympathy with the Bank of Japan.

On the merits Mr. Shirakawa is basically right, even if the BOJ itself has been justifiably accused of tightness at times in the past. Its benchmark interest rate is likely to be set at 0.1% for the foreseeable future and at the politicians’ prodding it renewed quantitative easing in early December. As long as businesses and consumers expect continuing stagnation, they’ll be unlikely to spend or invest that extra liquidity to spur growth.

The WSJ’s solution is structural reform: Read more

Robin Harding

Today’s consumer price index data show that “core-core” prices in Japan, that is excluding food and energy, were 1.2 per cent lower in December than a year ago. That is the biggest decline since the series began in 1971 – worse even than the numbers in 2001 when deflation was at the centre of Japan’s economic and political debate.

Yet the Tokyo economics community seems apathetic. The Bank of Japan said and did nothing much at its meeting on Tuesday, despite expecting deflation to persist through 2010 and 2011. Government ministers make pro forma calls on the BoJ to act but old hands say it is nothing like the pressure that went on in 2001. Read more