High inflation for consumer prices is almost always a threat to growth but deflation is not.

For the eight centuries beginning in 1210, the world's average annual inflation rate was only 1%, according to the Global Financial Database.  For  most of that period, however, the long-term 1% average concealed sharp swings between inflation and deflation.

In early 1930s, deflation disappeared, for reasons that remain mysterious but include the spread of the banking industry and the wider availability of credit, with consequently more money chasing the available goods.

The end of the gold standard in the 1970s made it easier for central banks to print money, which also tends to fuel inflation.

The result was that deflation disappeared completely on the global level, and bouts of deflation - particularly longer ones - became much less common within individual nations as well.  

Though deflation has largely vanished, worldwide, it continues to surface in isolated pockets.  

Japan is the only major country to have suffered a multiyear case of deflation in the postwar era, but many countries have suffered a single-year bout.  

Again, however, these periods did not have a consistent impact on growth, for better or worse.

No clear evidence that consumer price deflation is bad - or good- for economic growth.

In early 2015, the Bank for International Settlements (BIS) looked at the postwar record for 38 countries.  In all, these countries had seen more than 100 years in which prices fell.  

• On average, GDP growth was higher by a statistically insignificant margin during deflationary years, at 3.2%, than during inflationary years, at 2.7%.   
• The cases in which deflation was accompanied by strong growth occurred from Thailand and China to the Netherlands and Japan.  

The BIS concluded there is no clear evidence that consumer price deflation is bad - or good- for economic growth.

High inflation for consumer prices is almost always a threat to growth but deflation is not.

How can you tell when consumer price deflation is the good kind, driven by growing supply, or the bad kind, driven by shrinking demand?  

This task requires parsing conflicting forces of supply and demand, often with unclear results.  

The takeaway is simply that while many analysts now assume that any hint of deflation is worrisome, this assumption is not borne out by the evidence.  

High inflation for consumer prices is almost always a threat to growth but deflation is not.

The Real Inflation Threats

Inflation generally refers to the pace of increase in consumer prices.

1.  Historical inflation data

1970s

Consumer prices were rising at a double-digit pace and wreaking economic havoc all over the world.  

In early 1980s, they began to recede under pressure from rising global competition and a concerted attack by central banks.  

Raising interest rates to painful heights, central banks choked off money flows and won the war on inflation just about everywhere.

1981 to 1991

The average rate of inflation in developed nations fell from 12% to just 2%, where it remains today.

Meanwhile, in emerging nations, the average rate of inflation peaked at a staggering 87% in 1994 and reached the hyperinflationary triple digits in major countries like Brazil and Russia.  Then, over the subsequent decades, it receded to its current, much calmer rate of just 4%.

2.  Average inflation rates today

Any emerging nation with a rate of inflation much above 4% or any developed nation with a rate much above 2%, has cause for concern.  

In a world where double- and triple-digit consumer price inflation is a rare threat, the outliers are worth watching closely because they are out of balance and seriously at risk.

3.  Traditional thinking focuses on consumer price inflation only

High consumer price inflation is a growth-killing cancer

In the short term, 

• rapidly rising prices compel central banks to raise interest rates, 
• making it more expensive for businesses and consumers to borrow.  
• High inflation also tends to be volatile, and its swings make it impossible for businesses to plan and invest for the future.

Over the longer term, 

• inflation erodes the value of money sitting in the bank or in bonds, thus discouraging saving and 
• shrinking the pool of money available to invest in future growth.

4.  Post crisis of 2008 slow-growth environment fears outright deflation

The central banks are now fighting a very different war.  

Central banks often worry that inflation may be too low, not too high in the slow-growth environment that took hold after the crisis of 2008.  

In developed countries, instead of raising rates to make sure inflation doesn't increase too far above a target of 2%, they now cut interest rates when inflation is falling too far below 2%.  

Their big fear is that low inflation will lead to outright deflation - the dreaded but overblown "Japan scenario."

5.  Low inflation and deflation can be bad (depressed demand) and can be good (driven by new innovation and expanding supply)

History, shows that neither low inflation nor deflation are necessarily bad for economic growth.

"Bad deflation"  

Japan suffered a rare bout of "bad deflation" after the collapse of its stock and housing bubbles in 1990.  

• Consumer demand dried up, prices started to fall and shoppers began delaying purchases in the expectation that prices would fall further.  
• The downward spiral depressed growth for two decades.  

"Good deflation"

However, deflation can also follow a new tech or financial innovation that 

• lowers production costs and 
• boosts economic growth.

High inflation is always bad for growth, deflation maybe neither bad nor good

If inflation is too high, it is almost always a threat to growth but the same cannot be said of low inflation.  

Even if low inflation threatens to devolve into deflation, it could be good for growth if the falling prices are driven by new innovations and expanding supply, rather than by depressed demand.

6.  Post 2008 low interest rates environment

After central banks won the war on high consumer price inflation, they cut interest rates to levels that have fueled a massive run-up in prices for 

• financial assets, including stocks, bonds and 
• houses.  

In recent decades, stock market and housing bubbles have been increasingly common precursors to financial crises and recessions.

7.  The Real Inflation Threats

Economists have been very slow to recognize this new inflation threat, and central banks have been very slow to think outside their official mandates, which focus on stabilizing the economy by controlling inflation in consumer prices, only.  

But successful nations will control both kinds of inflation, 

• in consumer markets and 
• in financial markets.

Conclusions

The general rule is that strong growth is most likely to continue 

• if consumer prices are rising slowly or 
• even if they are falling as the result of good deflation, driven by a strengthening supply network.

In today's globalised economy, cross-border competition tends to 

• suppress prices for consumer goods but 
• drive them up for financial assets (stocks, bonds and houses).  

Thus watching consumer prices is not enough.

Increasingly, recessions follow instability in the financial markets.  

To understand how inflation is likely to impact economic growth, you have to keep an eye on stock and house prices too.

Malaysia is not heading for deflation: Economists

Publish date: Mon, 25 May 2020 



KUALA LUMPUR: Malaysia is not heading for deflation despite Consumer Price Index (CPI) having deflated further 2.9 per cent to 117.6 points in April from 121.1 in the same month in 2019, the lowest level since 2010, economists said.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said the core CPI, which removes the volatile items such as fresh food and administered prices, had been recording positive growth of 1.3 per cent for the past three months now.

"Therefore, it is not deflation since the primary driver for the decline in headline CPI was due to fuel prices and electricity charges whereby both sub indices have declined by 38.2 per cent and 33.3 per cent respectively during April.

"I do not think deflation is going to happen in a truer sense. We can see food prices are still at elevated levels. Some items have been reporting quite substantial increment," he told the New Straits Times.

Afzanizam said besides that, the country had been recording trade deficits in food items.

He expects food prices to stay high with the ringgit continuing to be weak.

He said in 2019, Malaysia had recorded a trade deficit in food items of RM17.4 billion. The deficit has remained since 1990.

He noted that the country's Self Sufficiency Ratio (SSR) for rice, beef and chilli had stood at 70 per cent, 25.5 per cent and 38.8 per cent respectively in 2017.

"This would mean Malaysia has been relying from import source in order to satisfy its local demand," he said.

Putra Business School associate professor Dr Ahmed Razman Abdul Latif said he did not foresee the country heading towards deflation as the lower CPI was caused mainly by the decrease of global crude oil price for the past few months.

He said this had in effect reduced the costs of transportation and fuels.

He said, however, prices of global crude benchmarks such as Brent had steadily increased for the past few weeks towards US$35 per barrel which will stabilise the CPI movement.

"In addition, the price of food and beverages has increased steadily and this will also ensure that the CPI will not go towards negative number," he said.

RAM Ratings expects a deflationary trend in the second and third quarters of this year.

The firm revised its headline inflation projection for 2020, from 0.7 per cent to 0.0 per cent.

This is mainly due to weak global oil prices, generous discounts for household electricity bills, and subdued demand.

"While inflation remained stable at 1.5 per cent in January-February, it is expected to ease to -0.2 per cent in March," it added.



https://www.nst.com.my/business/2020/05/595198/malaysia-not-heading-deflation-economists



Comments:

What makes deflation such a dreaded condition is that, once it takes hold, it motivates consumers to hold back on spending in the expectation that they will be able to buy things at a cheaper price later. This causes further drop in demand today, leading to more cutbacks in production and even slower economic activity, which feeds into more price declines -- a highly destabilizing dynamic.

What makes deflation such a dreaded condition

Deflation is an empty threat (so far)
In such a deep recession, the word is bound to come up. But a close look at the numbers shows that it's a long shot at this point.

Anthony Karydakis, Contributor
December 18, 2008: 9:37 AM ET

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This recession has been so unusual that it has brought back economic phenomena that haven't been seen in generations, at least not in the U.S. Chief among them is deflation. It's a scary prospect that has been on people's minds since evidence of a deepening recession started proliferating quickly earlier in the fall.
What makes deflation such a dreaded condition is that, once it takes hold, it motivates consumers to hold back on spending in the expectation that they will be able to buy things at a cheaper price later. This causes further drop in demand today, leading to more cutbacks in production and even slower economic activity, which feeds into more price declines -- a highly destabilizing dynamic.
Against that backdrop, the report earlier this week on November's Consumer Price Index (CPI) was eagerly anticipated, as it was likely to shed some light on whether such deflation fears are realistic in this environment. The anxiety over such a prospect had already been heightened by a sizeable decline (-1.0%) in the index in October and a highly unusual drop (-0.1%) in the so-called "core" CPI that month. (Core CPI is the overall index minus the notoriously volatile components of food and energy, which together account for about one-fourth of the total.)
So, with the stakes so high for the November report, what was the verdict?
On the face of it, the sharp 1.7% decline in the CPI last month (its biggest monthly drop ever and its fourth consecutive one since August) added fuel to the concerns that the economy may be about to get hit by powerful deflationary forces. Adding to that impression, the CPI is now up only 1.1% in the last 12-month period, while it was up by 3.7% in the 12-month period to October and 5.6% in the corresponding period to July.
So, there is no doubt that a major downtrend in the rate of inflation is already manifesting itself in strong terms. It is important, though, to draw a sharp distinction between the terms "disinflation" and "deflation," which are sometimes inadvertently lumped together. The first means a slower pace of inflation (that is, prices are still rising), while the second means an outright decline in the price level.
However, before jumping to the conclusion that deflation is around the corner, it's important to consider several factors that present a significantly less bleak picture.

Let's begin with some basic facts:
November's decline in the overall index was largely due to a 17% decline in energy prices and, specifically, a nearly 30% collapse in gasoline prices. However, excluding the food and energy components, the core index was flat for the month, despite a 0.6% decline in new vehicle prices, in line with dismal auto sales numbers reported in the last couple of months by all automakers. Several key categories (apparel, entertainment, medical care, shelter costs) all showed moderate increases, suggesting the absence of any broad-based downward pressure on prices.
So the inflation downtrend since July is largely the result of a dramatic decline in commodity prices (and particularly energy prices) and to a lesser degree the rebound of the dollar and the pullback in consumer demand. Looking ahead, it appears that the pace of erosion in commodity prices is slowing and the dollar's rebound is stalling, as the perceived depth of the U.S recession is raising some anxiety around the globe.
As a result, any further declines in the overall CPI are likely to moderate in the coming months. Still, there's a realistic probability that at some point in the next few months, the CPI will dip into negative territory on a 12-month basis and the word "deflation" will start appearing in headlines again.

The question that arises then is: Does this mean that the dreaded deflationary forces, which in the postwar era had visited only Japan among the major industrialized countries (for a protracted period starting in the '90s), have now reached the U.S. shore?
The answer is: not necessarily so, for two reasons:
1. A simple dip in the overall CPI for a few months into negative territory on a year-over-year basis is not tantamount to a full-fledged deflationary trend. For such a dynamic to emerge, it will take a more prolonged period of declining prices, which can only be achieved in the context of a lengthy and steadily deepening recession. This is not a totally unrealistic scenario, but it disregards the Fed's series of extraordinary measures (including Tuesday's decision to bring the overnight interbank rate down essentially to zero) and the massive domestic fiscal-stimulus program waiting in the wings. The combined effect of such unprecedented actions should help cushion any further downside risks beyond the first quarter of 2009.
2. A generally more reliable measure of inflation (although less popular in terms of broader public perceptions) is the core CPI, which, by excluding the two most volatile components (food and fuel) of the index, also tends to be dramatically more stable over time. True, the core index has also drifted lower since July but at a much more measured pace, 2% last month, down from 2.5%. Changes in the core index are very incremental on a month-to-month basis, so it is unlikely that it will slip into negative territory any time soon. In all likelihood, the economy will have already started showing signs of life by the time such a slow-moving downtrend brings the core CPI close to the feared zero mark.
It is exactly because of the less noisy nature of the core CPI that Fed officials tend to pay considerably more attention to that price measure--rather than the overall CPI--in addition to their favorite inflation indicator, the core PCE (Personal Consumption Expenditures) price index. Both of these measures are currently in the vicinity of 2% and unlikely to emanate any deflationary signals in the foreseeable future.
Naturally, the longer the recession drags on, the higher the risk that the current disinflationary trend will convert itself into a deflationary one. But the distance between the two is real and, at this point, the risk of the latter outcome -- beyond the phase of a simple arithmetic quirk for a short period--is indeed low.

Anthony Karydakis is a former chief U.S. economist with JP Morgan Asset Management and currently an Adjunct professor at New York University's Stern School of Business.

http://money.cnn.com/2008/12/18/news/economy/deflation_recession.fortune/