The release of recent minutes of the
FOMC deliberations on core interest rate rises indicates that, even if they
decided to keep it out of the monetary policy statement, the committee members
are concerned about the fact that inflation in the USA is not responding to the
stimulants (GDP growth, falling unemployment, rising consumer confidence and so
on) that would normally be calculated to make it head towards the 2% per annum level
that is so beloved by economists the world over. It is currently hovering
around 1.6% but there are real fears that it could go lower in the coming
months.
The main driver of this tendency, of
course, is the precipitate fall in the price of oil, and indeed of most other
commodities. Even milk producers, despite the demand out of China, are feeling
the pinch of falling prices from the processors. The decline in the price of
oil has been exacerbated by the decision of Saudi Arabia not to cut production
as a means of sustaining the price of crude. Their reasons for doing this are
variously reported as being about a lack of confidence that other OPEC members
will follow suit and therefore get a free ride at the Saudis' expense, to the
idea that they can put pressure on US shale oil and gas producers by driving
the price down to a level that is uneconomic for them. Perhaps the truth, as
is so often the case, lies somewhere in the middle, and both of these things
are factors.
Why
the fear of low inflation?
The standard argument for a fear of
low or negative inflation is that it causes would-be purchasers of big ticket
items to delay their decision to buy, in the belief that they can get the item
cheaper at some time in the future, thereby damaging economic growth, which
depends on consumption.
The problem with this argument this
time around is that, while the overall inflation figure in all developed
economies is heading down, this is entirely due to one component of the
measure, energy. All the others, food, alcohol and tobacco, non-energy
industrial goods, and services, are still rising. This means that there is no disincentive
to buy in regard to these categories. And even if there were, the rapid
developments in technological innovation mean that price is no longer the main
factor in people’s decision to purchase. Take motor cars for example – massive overcapacity
in this industry some years ago meant that the manufacturers had to come up
with innovations that would encourage purchases while trying to maintain profitability.
And they did. Your average car salesman or woman is well up to this kind of
challenge.
In the meantime, falling energy
prices are a boon to consumers. Reflected in the prices of consumer goods, they
encourage far more consumption, not less. And agitation for wage rises, which
damaged business and caused untold disruption, is a thing of the past.
So what is it then, that makes the
current bout of low price rises such an apparent problem for central bankers?
The answer has to be debt. One thing that high inflation does is, it makes it a
lot easier, over time, to repay loans. Money that was borrowed previously, when
its value was higher, can be repaid with present day funds that have been
devalued by inflation. In the 1970s, when there was rampant inflation, this was a wonderful thing for borrowers. Real
interest rates, or the nominal rate less the rate of inflation, were negative
for a long time.
And the world is now awash with debt.
Governments are way over-borrowed, as are individuals. Banks are loath to make
new loans until such time as they can deleverage, or get rid of the debt that
is already outstanding.
Is this the real reason the powers-that-be
in the economic world are so anxious to see average prices rise again?
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