Are we heading for a Japan-style slump?
A few months ago, everyone was worried about inflation. Now all talk is of a deflationary spiral. So are we destined for the same fate as Japan?
"It is remarkable that in just a few months fears have switched from inflation to deflation," said Nigel Gault of HIS Global Insight. Now there is talk of a Japanese-style deflationary crisis. Last month the annual rate of consumer price inflation (CPI) tumbled from 5.2% to 4.5%, the sharpest fall in 16 years. Sharp slides in petrol (down 6.1% in October) and food inflation were chiefly responsible, while core inflation (minus food and energy) eased for the first time since February.
Deflation spiral could settle in...
Consumers curb their spending in the expectation that prices will fall even further. This means lower sales and falling employment, thus reducing spending, overall demand and prices further in a downward spiral. An added element is that British households retrenching, due to sliding house prices and rising unemployment are the most indebted of any leading economy, and debt's real cost rises during deflation. This portends a rush towards deleveraging, reinforcing the downward demand and price cut spiral. In Japan, zero interest rates failed to counter the burst debt bubble, and monetary policy has had scant impact in America and Britain so far.
...on both sides of the pond
In America, consumer prices slumped by 1% in October, a record monthly drop. Goldman Sachs expects inflation to turn negative next autumn. And signs of deflationary forces gaining momentum are mounting. The manufacturing capacity utilisation rate has hit a five-year low, while on the consumer front, retrenchment is in full swing. Companies are cutting prices across the board and retail sales posted their steepest monthly drop in 21 years in October. Households are clearly determined to start crawling out "from under their debt morass", as David Rosenberg of Merrill Lynch put it. A Fed survey shows a record number of people intend to take on less debt; demand for mortgages is also near record lows. Deflation? "You ain't seen nothing yet," said Rosenberg.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Sign up to Money Morning
Our team, led by award winning editors, is dedicated to delivering you the top news, analysis, and guides to help you manage your money, grow your investments and build wealth.
-
Do you qualify for the Winter Fuel Payment if you live abroad?
The Winter Fuel Payment will be means tested for expats living in Europe, in line with the new rules impacting those in the UK. But a quirk in the system means not all countries are eligible.
By Katie Williams Published
-
What the Employment Rights Bill means for your job
New workplace reforms are set to give employees new rights to benefits and flexible working
By Marc Shoffman Published