Some economists worry that the rate of deflation used in the national accounts may be overstated.
ECONOMIST: It is too early to celebrate economic recovery in Japan
The real threat in the U.S. is deflation until the unemployment rate begins to steadily decline and economic recovery is a sure thing.
FORBES: Geithner Testimony Trumps Paulson, Bernanke And Obama State Of The Union
For instance, the rate of deflation in capital goods has deepened, with prices falling by 6.9% in the year to the second quarter.
ECONOMIST: It is too early to celebrate economic recovery in Japan
It would oblige Argentina to continue trying to adjust its real exchange rate by deflation (cutting nominal wages and prices in nominal terms), a process which has already forced the collapse of many businesses.
The region is forced to acquire dollar assets in order to avoid exchange-rate appreciation and deflation.
The instrument is implemented in the UK and US, where the central banks consider that there are risks of deflation and where the policy rate is constrained by the zero lower bound.
FORBES: Don't Rule Out Quantitative Easing: Top ECB Official
Japan, on the other hand, seems settled in an ultra-low rate, counter-deflation, mode.
His rhetoric must focus on deflation fears, disagreements on the true rate of inflation and the need to stimulate the economy and create jobs.
And already, because of inflation in Brazil and price deflation in Argentina, the real exchange rate between them is close to its pre-devaluation level.
ECONOMIST: Another president caught in Argentina’s economic trap | The
Moreover, in a deflation, where prices fall, a low rate of interest can be very high in real terms.
The Federal Reserve Board's cut in the target federal funds rate to 1% suggests they fear deflation, not stagflation, the worst scenario of all--what we had during 1982.
ECB's policy is that, in current circumstances, it may not be sensible to focus, as the central bank does, on the average inflation rate in the euro area, if this risks creating deflation in Germany.
However, Germany's core inflation rate is only 0.6%, perilously close to deflation.
Who's going to win the next roll of the dice--fixed-income savers praying for deflation, even if that means another Great Depression, or fixed-rate mortgage borrowers praying for a weak dollar?
In other words, the deflation that we had earlier is being offset, leaving the two-year rate much flatter.
Europe's slide toward deflation is not helped by its weak economic environment: The euro zone jobless rate rose to 9.5% in May, from 9.3% in April, hardly evidence of green shoots.
This could take the form of an interest rate cut, if the euro appreciated too far since this could lead to deflation.
On October 2, 2001 the Greenspan Fed cut the funds rate 50 basis points to 2.5% and continued cutting the rate to 1.0% on June 25, 2003 on fears of Deflation.
With Bernanke and Co. pledging to keep buying bonds until the end of June and also to maintain ZIRP (zero interest rate policy) for as long as there is any threat at all of deflation, traders knew exactly what to do.
However, Takatoshi Ito of Tokyo University and Frederic Mishkin of Columbia University argue that whereas inflation-rate targets may be best in normal times, once an economy is suffering deflation there is a stronger case for a price-level target because it requires a compensating period of higher-than-normal inflation.
And if a devaluation cannot be used to reduce real wages, the real exchange rate overvaluation will be undone via a slow and painful process of wage and price deflation.
According to the GDP deflator, a broad index of prices, deflation tightened its grip on the economy in the fourth quarter, with prices falling at an annual rate of 4.4% (see chart).
With a jobless rate of 10.2% and oodles of idle capacity, America still faces a bigger threat from deflation than from inflation.
应用推荐