Tuesday, November 18, 2008

Inflation falls sharply

I will admit to being a little surprised by the extent of October's fall in inflation. However, I still think we are a very long way from deflation. The CPI inflation rate largely fell due to declining commodity prices, particularly oil. The decline in sterling may yet counteract these price falls.


  1. This is a short temporary period of disinflation caused by disappearing credit. The government has already preemptively responded to a debt deflation spiral by lowering interest rates and pumping money into the banks. Don't worry, inflation will be out of control soon enough. See this post for an analysis of this effect in the US:

  2. Alice,

    You say you are surprised by the extent of the fall in inflation. I almost fail to see why. You know what the price of oil was 12 months ago (hovering around $90 per barrel) and you know what the price was in October (falling from $80 to $60 through the month). Where's the surprise?

    Moreover, this is only the start. By July of this year the price was $147 a barrel. If it's anything less than that by next July it will obviously affect the inflation figures negatively. In other words, we could see a sharp rise in the price over the next few months and it would still be deflationary. The same is true in varying degrees of most other commodities.

    The real question is whether these price falls are a short term response to a speculative spike in commodity prices. If so, prices should stabilise, and we will avoid deflation. If they continue to fall we could be in for a nasty bout of deflation. Either way, we can forget about inflation for the next 12 months at least.

    I said I "almost" failed to understand your surprise. I suspect you view all events through the prism of your self-proclaimed renter bitterness. I still think yours is a great blog, but you need to take a more detached approach from time to time.

    As I've said before, we're going to have the most wonderful house price crash. You'll have plenty of opportunity to spit venom at estate agents, BTLetters, your smug house owning friends and any other idiots caught up in the recent bout of madness.

    Young Mark

  3. I happen to be extremely tired of deflation being presented as something to avoid. It should be the very natural outcome of increasing productivity in the economy as we become able to produce more with less inputs, thus decreasing prices.

    It's a major ideological victory of the central banking fraud that people expect and almost wish for small price increases every year.

    Alice - while I agree with about 90% of this blog, I think reality is about to mug you on the inflation/deflation debate.

  4. young mark

    who wants to read a "detatched" blog? If I wanted that I could buy the ft. Give me the bitterness; I love it!


  5. Strange, I'd have thought much of your graphs and arguments actually support the deflation thesis.
    I suspect we will see deflation for a short period, perhaps a year or so .... before we explode into hyperinflation-hell. I agree with Nick's post that the "DEFLATION TERROR" is a product of central bank PR. Deflation is shockingly painful, but the only way out of it is a)extreme fiscal responsibility and patience OR; b) the complete destruction of the pertinent currency.

  6. I'm sure if I could be bothered to look back at some of your old posts on inflation I would find in the comments my prediction that come the end of 2008, and into 2009, inflation would die down very rapidly, and by mid 2010 be close to, or in, negative terms.

    I stand by that prediction.

    Beyond that I am less sure. If deflation takes hold and people get used to the idea that things will be cheaper next month, every month, we would be in serious trouble. My best guess is that the fall in the pound will cause import prices to rise enough to counteract the deflationary forces, and result in overall stable prices, in the 0-1% range, for some time to come.

    Beyond that, I can see how people are predicting hyperinflation. Money being thrown at the financial sector by the govts of the world now must go somewhere. I just don't where, and whether it will end up in the economy as a whole.

  7. An awful lot of nonsense is talked about inflation and deflation. Lets take the conventional view that we are talking about change in price. We cannot draw any conclusions unless we understand WHY prices are changing.

    It is sometimes said that inflation will reduce the burden of debt - but if wages are static, the burden will get worse, not better, since we have to pay more for goods, as well as paying the debt.

    It is sometimes said that deflation will lead to depression - but not if falling pices are due to increased productivity.

    At present we are talking about change in price due to change in money supply (cash and credit). Everybody knows that the debt taken on by many people and organisations is unpayable. I subscribe to the Ka-Poom theory - a period of falling prics followed by rapidly rising prices. This is because ultimately the government can take control of the money supply, and governments will always opt to write of bad debt in a controlled devaluation, rather than chaotic default.

  8. Young Mark says:

    "I almost fail to see why. You know what the price of oil was 12 months ago (hovering around $90 per barrel) and you know what the price was in October (falling from $80 to $60 through the month). Where's the surprise?"

    But RPI/CPI measure prices in GBP. As the Pound has fallen by 25% in the past year, the current USD50 oil price is equivalent to USD67 in last year's Pounds. Still a fall, but offset by other price rises caused by the weakening Pound.

  9. I expect inflation to rise big time when the effect of the weak pound comes into force.
    Already, the cost of imported stuff is rising - expect sporting goods, bicycles etc... to rise by 30% in 2009.
    Thanks again Gordon... moron !