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Vocapedia > Economy > Deflation, Stagflation




Kipper Williams



The Guardian

Thursday November 13 2008    08.37 GMT









deflation        UK / USA





























put Britain on the brink of deflation        UK


















stagflation        UK / USA


Stagflation is a period

when economic growth is stagnant

but when prices rise.


Recession is at least

two quarters

of negative economic growth.


the-spectre-of-stagflation-827745.html - 23 October 2011


















Corpus of news articles


Economy > Inflation, Deflation, Stagflation




The spectre of 'stagflation'

It was the curse of the 1970s
– rampant inflation and stagnant economic growth.
Now there are fears that Britain
could once again be haunted
by the spectre of 'stagflation'


Wednesday, 14 May 2008
The Independent
By Sean O'Grady, Economics Editor

A combination of stagnant output and high inflation not seen for decades is set to haunt policy makers for months if not years to come.

Even with the credit crunch, the housing market at its lowest ebb in 30 years, high street sales at their most miserable in half a decade, and industry reporting a collapse in orders, prices are still rising – and at an ever-faster rate. The Chancellor, Alistair Darling, did not admit as much in his mini-Budget yesterday, but his injection of £2.7bn of spending power into the economy may be designed to prevent a catastrophic collapse in demand as Bank of England policy makers find their room for manoeuvre to reduce interest rates constrained by record inflation.

In April, we discovered yesterday, consumer price inflation hit 3 per cent, well above the official target rate of 2 per cent, and a whisker away from the level at which the Governor of the Bank of England, Mervyn King, is obliged to write an open letter to the Chancellor of the Exchequer explaining the failure of policy.

The jump, from 2.5 per cent last month, is the most dramatic since 2002, and the rise in the cost of living is unusually broadly based. The retail price index, which includes housing costs, rose to 4 per cent, up from 3.8 per cent the previous month. Increases in the sort of basic items that families have to buy were the highest. Food is 7.2 per cent up on a year ago, with analysts expecting 10 per cent inflation in a few months. And it's the essentials that are up the most – bread by 13 per cent, butter by 32. 2 per cent and eggs by a third. The increase in food prices is the fastest since 1990.

The twin effects of the credit crunch and the commodities crunch have sucked purchasing power out of the economy while increasing the cost of housing, food, energy and almost everything else. Global food prices are up 40 per cent in a year and oil is up by 70 per cent – a barrel costs four times what it did in 2004. With the American property market still in freefall and the sub-prime crisis as acute as ever, little seems to ease the credit crunch. Propelled ever higher by an insatiable demand from China and other fast-growing emerging economies there also seems little end in sight to the rise in commodity prices.

The 15 per cent decline in the value of sterling – as steep as when the pound was forced out of the ERM on "Black Wednesday" in 1992 – has exacerbated inflationary pressures. The fall is hitting living standards, especially for pensioners and the poorest.

Electricity bills are 8.3 per cent higher and gas up 3.7 per cent. Heating oil is a staggering 59.4 per cent more expensive than this time last year. Yesterday British Gas became the latest energy supplier to threaten yet more price rises by the end of the year, having raised its tariffs by 15 per cent in January. Average household gas bills could top £1,000 in 2008. The average price of petrol rose by 1.9p per litre between March and April this year, with diesel up by 4.2p a litre.

During the past few years or so, the Bank of England's Monetary Policy Committee (MPC) would have a simple remedy for such an increase in prices – a rise in interest rates. During the "Great Stability", a decade of generally low inflation, low interest rates and rapidly rising living standards, policy makers could expect to influence the economy relatively easily. Now their task is more difficult, as they are pulled between the need to fight inflation and avoid a slump.

The Bank of England recognised the danger of inflation this time last year, and began a programme of interest-rate rises to rein it in. Then came the credit crunch, the risk of recession, and the plan was abandoned. The fear was of a slump, one that would damage the economy so badly that, if anything, the longer-term danger would be of inflation undershooting the target as demand and confidence collapsed. The need to prevent this happening while tolerating a "temporary spike" in inflation has been the Bank of England's rationale for a series of interest-rate cuts since last autumn. However, after a quarter percentage point cut to 5 per cent in April, the Bank has chosen to keep rates on hold this month. It could mark the end of that plan, and a return to a keener watch on rising prices.

Tellingly, the MPC knew how bad the new inflation figures would be when members met last Thursday. Economists now believe that a rate cut that had been predicted for June will also be cancelled. The Inflation Report, due from the Bank today, will tell us more about how they see the likely "path" of rates over the next year or so.

Matters are made more complicated because the Bank's "policy rate" is almost irrelevant when market interest rates remain stubbornly high, thanks to the credit crunch. Almost as fast as the Bank of England has been reducing rates the commercial lenders have been raising them and putting up their fees for arranging a mortgage, cutting the flow of funds into the housing market by a half.

Attempts to "inject liquidity" into the banks by swapping government securities for unwanted mortgage-backed securities have been only partially successful. At least for now, the Bank seems more concerned about inflation. Even so, there is little chance of the MPC raising rates to address this danger. Mr King said as recently as two weeks ago that "it doesn't make sense to raise interest rates at this stage to induce a recession to keep inflation below 3 per cent".

Yet a recession may be just what Mr King gets – no matter what he and his colleagues do. The British economy is growing at its slowest rate for three years, with expansion in the first quarter of this year just 0.4 per cent, compared with a rise of 0.6 per cent in the previous quarter. Bank officials have admitted that its forecast for growth is consistent with the possibility of a brief, shallow recession, that is negative growth. Few now expect the Government's official estimate of growth in a 1.75 per cent to 2.25 per cent range to be achieved. Most independent observers put the growth rate much lower, some as low as 1 per cent this year. Even the bottom range of the Treasury's own projection would be consistent with a quarter or two of virtually no growth, as close to a recession as makes no difference. Some sectors are already in, or close to, recession.

Most ominously, this week saw a sharp rise in the number of "forced sales", consistent with last week's poor news on repossessions. The accidental leak by the Housing minister, Caroline Flint, of an expectation of a 5 to 10 per cent decline in house prices looks optimistic by some standards.

This time next year, on the conventional four-year cycle, the country should be in the middle of a general election campaign. Gordon Brown may find himself haunted not only by the spectre of stagflation, but by the infinitely more terrifying spectre of humiliation and defeat.

    The spectre of 'stagflation', I, 14.5.2008,






Consumer Price Drop

Prompts Fear of Deflation


November 20, 2008
The New York Times


In another sign that the struggling economy continues to slow, consumer prices tumbled by a record amount in October, carried lower by skidding energy and transportation prices, raising the specter of deflation.

The Consumer Price Index, a key measure of how much Americans spend on groceries, clothing, entertainment and other goods and services, fell by 1 percent in October compared with prices in the previous month, the Labor Department reported Wednesday morning.

It was the steepest single-month drop in the 61-year history of the pricing survey and raised concerns about deflation as the economy contracts and demand for goods and services plunge. Another report released Wednesday indicated that new home construction continued to fall. “This month it’s more than slowing, it’s outright contraction,” said James O’Sullivan, United States economist at UBS. “And yes, if you extrapolate that, it’s deflation.”

A continued decline in prices could worsen the economic slowdown by making it harder to pay off debts and would negate the impact of interest-rate cuts by the Federal Reserve.

Even excluding volatile food and energy prices, prices dropped 0.1 percent in October, the first such decline in more than two decades. Mr. O’Sullivan said that he expected core prices, which are up 2.2 percent this year to continue to fall back, but he does not expect them to slip into negative territory..

“You’re going to see huge declines in a month’s time in the November reports,” Mr. O’Sullivan said. “That’s the biggest part of the weakness.”

Energy prices led the decline in October, falling 8.6 percent as the price of gasoline continued its steady slide from highs of more than $4 a gallon. The costs of transportation fell 5.4 percent while clothing prices fell 1 percent.

“It’s funny that just a few months ago everyone was wringing their hands over inflation,” said Nariman Behravesh, chief economist at Global Insight. “It’s gone. It’s over.”

“The dominant and common factor is the plunge in gasoline prices, which drove the bulk of the weakness,” Mr. Sullivan said.

In a speech Wednesday at a Washington conference, the vice chairman of the Federal Reserve, Donald L. Kohn, said the risk of deflation remained slight but was increasing. “Whatever I thought that risk was, four or five months ago, I think it is bigger now even if it is still small,” Mr. Kohn said. The Fed, he added, needs to be aggressive, if necessary, to prevent a drop in prices.

But economists said the Federal Reserve had limited its options after repeatedly cutting interest rates in recent months. The target rate for the federal funds rate is now 1 percent after a cut of half a percentage point in October. Still, many are expecting another cut at the next meeting in December.

A report on the beleaguered real estate market showed that housing starts fell 4.5 percent in October, to a seasonally adjusted 791,000. Housing starts last month were 38 percent lower than their October 2007 levels.

Shares on Wall Street were sharply lower Wednesday morning following the reports

Economists said the tumbling consumer prices offered more evidence that companies ranging from boutiques to airlines to car dealerships were beginning to offer deep discounts to compete for a shrinking pool of disposable cash. Americans have tightened their spending as job losses mounted and easy credit dried up, and retailers are bracing for a punishing holiday shopping season.

“We’re looking at a pretty deep recession now,” Mr. Behravesh said. “ All of a sudden, any pricing power that companies might have had is gone. You’re going to see discounting like crazy going on. All kinds of sales. You’re going to see all kinds of prices being slashed.”

With consumers pulling back, many analysts are expecting a difficult Christmas shopping season. Retail sales, for example, were down 2.8 percent in October from September, and 4.1 percent from October 2007 as consumers pared their spending.

The price of food and beverages edged up in October, and was still 6.1 percent higher than the same period last year. Alcohol, cereal, meat, fish and desserts were all more expensive in October while the price of produce and dairy products dipped slightly.

And while energy prices fell sharply in October, they were still an unadjusted 11.7 percent higher than a year ago, thanks to a long run-up in oil and energy costs. The decline in consumer prices was just the latest symptom of an ailing economy. On Tuesday, the government reported that wholesale prices dropped a record 2.8 percent last month as commodities prices plummeted on slumping worldwide demand. Crude oil prices, which peaked near $150 a barrel this summer, are now hovering at $55 a barrel, and the prices for gold, silver and other metals have collapsed.

    Consumer Price Drop Prompts Fear of Deflation, NYT, 20.11.2008,






News Analysis

That ’70s Look: Stagflation


February 21, 2008

The New York Times



Lately, many people are hearing an echo — faintly perhaps but distinctly audible — of the stagflation of the 1970s.

Even as economic growth sags, oil and gasoline prices are surging to new heights. Gold is on the rise, along with the prices of such basic commodities as wheat and steel. And on Wednesday, with the latest government report on consumer prices, there are signs that overall inflation, after years of only modest increases, may be breaking out of its box.

For the Federal Reserve and its chairman, Ben S. Bernanke, all this could not come at a worse time. With the credit markets in disarray from the collapse of the housing bubble, Mr. Bernanke is cutting rates in a headlong rush to blunt the risks of recession.

But in putting its emphasis above all on reviving growth, America’s central bank, according to some economists and even a few Fed officials, may face a bigger inflation problem down the road.

“They are cutting rates with a bill to be paid later," said John Ryding, chief United States economist at Bear Stearns. “The question is not, will we get inflation, but how much will it cost to stuff the genie back in the bottle. This has the feel of 1970s stagflation.”

Over the last 12 months, consumer prices are up 4.3 percent on average, according to the Labor Department. The core index of consumer price inflation, which excludes food and oil, was 2.5 percent higher in January than a year earlier, significantly above the Fed’s unofficial comfort zone of a 1 to 2 percent underlying inflation rate. That’s a far cry from the double-digit inflation rates that battered the economy at times in the 1970s, but still worrisome.

Analysts like Mr. Ryding say that by tolerating such price rises and maybe even allowing them to escalate, the Federal Reserve is risking its hard-won credibility as an inflation fighter, which will ultimately require it to push up interest rates higher than otherwise to contain the damage.

Most economists still expect the Fed’s policy-making committee to cut interest rates again when it meets on March 18, engineering its sixth reduction since September. But the fears of a revival of inflation underline the difficult decisions it now faces.

Like the Fed, economists generally remain more concerned about the immediate threat of recession than the more distant fear of higher inflation. Recent data suggests an economy that may be in a downturn or close to it. The consensus view is that the expected slowdown is likely to create enough spare capacity to suck inflationary pressures out of the economy.

Moreover, even if some additional inflation is a side effect of the Fed’s prescription, many economists say, it sure beats the alternative. Once the interest rate cuts have nursed the economy through the next few difficult quarters, they say, the Fed can easily raise rates again to respond to any pickup in inflation.

“They are going to fix the wound now,” said David Durst, chief investment strategist of the Global Wealth Management Group of Morgan Stanley. “They are going to take care of the growth situation and then fight inflation when the economy gets stronger.”

Reinforcing this view, there are few signs that inflation is seeping into the labor market and pushing up wages in anticipation of higher prices to come.

That may be comforting to the Fed, but keeping inflation contained still may not be easy. In recent days some officials at the central bank have gone out of their way to warn that they are not prepared to let down their guard — even if it means that the Fed has to be less aggressive about cutting interest rates.

In a speech this month, Richard W. Fisher, president of the Federal Reserve Bank of Dallas, said “the Fed has to be very careful now to add just the right amount of stimulus to the punch bowl without mixing in the potential to juice up inflation once the effect of the new punch kicks in.”

Charles I. Plosser, president of the Federal Reserve Bank of Philadelphia, echoed that view, saying in a speech that “we cannot be confident that a slow-growing economy in early 2008 will by itself reduce inflation.”

“As we learned from the experience of the 1970s,” Mr. Plosser added, “once the public loses confidence in the Fed’s commitment to price stability, it is very costly to the economy for the Fed to regain that confidence.”

In a telephone interview, Mr. Plosser explained that the Fed seemed to be making progress against inflation in the first half of 2007 but he started to become more worried during the second half.

“Since the summer almost all of the measures of inflation that we look at have begun to accelerate again, and in some cases pretty sharply,” Mr. Plosser said. “Perhaps the inflationary pressures are more broad-based than just energy.”

While Mr. Plosser said he hoped that inflation was about to moderate on its own, “we do have a dual mandate after all — one is price stability and the other is growth.”

“We can’t just throw one out of the window when it is convenient.”

To Bernard Baumohl, managing director of the Economic Outlook Group, such talk is seen on Wall Street as a clever tactic intended to help jawbone inflationary expectations downward while the Fed continues to cut rates for at least a while longer.

“We expect Fed officials will ramp up their rhetoric in speeches and in testimony that they will work diligently to keep inflation expectations under control,” Mr. Baumohl wrote to clients after the latest consumer price figures were released Wednesday. “Mere words, to be sure. But it would be a mistake to construe them as hollow.”

Zach Pandl, an economist at Lehman Brothers, said that the statements so far have been by less important Fed officials and that the Fed’s real views should be measured by its actions, which are to cut rates aggressively with less concern about inflation.

Those actions have led a number of economists to warn that the Fed’s aggressive easing moves, combined with the strong demand for industrial and agricultural commodities from emerging global economic powers like China and India, may be laying the groundwork for a new era of rising inflation.

“The period of falling inflation that we have been in for all the ‘80s and ‘90s and early 2000s has come to an end,” said Michael Darda, chief economist at MKM Partners, a research and trading firm in Greenwich, Conn. “That is over.”

Mr. Darda points to the surge in commodity prices, including food and oil. Long-term rates are rising in the bond market, reflecting the view that both growth and inflation may pick up later this year and into 2009, as well as fears about bad debt.

And, according to Mr. Pandl, a measure of investors’ inflation expectations provided by the difference between the yield on normal Treasury securities and Treasury inflation-protected securities “spiked quite a bit higher” after the Fed cut rates in January even though it “has been trading lower since then.”

Then there is gold, which has historically been a refuge for investors seeking protection from eroding currencies.

Gold “has risen a lot since the Fed began lowering rates,” Mr. Darda said. “That’s an ominous sign. Once we are in 2009 and 2010, we are going to figure out that inflation is far less benign.”

That ’70s Look: Stagflation,










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