deflation

Types of deflation

Types of deflation

Is deflation good or bad? Mostly experiences of deflation in western economies have been damaging – deflation has been associated with falling rates of economic growth and higher unemployment. However, it is possible to have a different type of deflation – from rapidly improving productivity; then deflation can be consistent with higher rates of economic growth.The key issue is – what is causing the deflation and if prices are falling – what is happening to real wages and real interest…

Causes of deflation

Causes of deflation

Readers Question: What is the cause of deflation? Deflation involves a fall in the price level –  a negative rate of inflation. From a very basic standpoint, there are two main potential causes of deflation:A fall in aggregate demand (AD) A shift to the right of aggregate supply (AS) – i.e. lower costs of production through improved technology.Deflation usually occurs during a deep recession, when there is a sustained fall in demand and output. This deflation may occur in the…

Impact of falling oil prices

Impact of falling oil prices

In recent months the price of crude oil has fallen 50%. This fall in the price of oil has a significant impact in reducing transport and other business costs. Falling oil prices is good news for oil importers, such as Western Europe, China, India and Japan; however, it is bad news for oil exporters, such as Venezuela, Kuwait, Iraq and Nigeria.Impact of lower oil prices on oil consumers Lower oil prices help to reduce the cost of living. Oil-related transport costs will…

Problems of deflation

Problems of deflation

Deflation is defined as a fall in the general price level. It is a negative rate of inflation. It means the value of money increases rather than decreases. Deflation is not necessarily bad, but often periods of deflation / low inflation can lead to economic stagnation and periods of high unemployment. This is because deflation can discourage spending because things will be cheaper in the future. Deflation can also increase real debt burdens – reducing the spending power of firms and consumers.

GDP deflator

GDP deflator

GDP deflator (implicit price deflator for GDP) is a measure of the level of prices of all new, domestic goods and services in an economy. The GDP deflator regularly updates the type of goods and services used to measure the implicit price deflator – depending on which goods are being bought.e.g.If the price of mobile calls increase relative to landline calls, people will spend less on mobiles so the rise in price becomes less significant.. This is the same…

Deflationary Bias in the Eurozone

Deflationary Bias in the Eurozone

Readers Question: Is there an inbuilt deflationary bias in the Eurozone? Note: I originally wrote this post in 2010. Unfortunately, every year there is a reason to update the post and suggest the deflationary bias in the Eurozone keeps getting stronger.Deflationary bias means that there is a tendency for economic policy to promote lower growth and lower inflation. It means there are pressures which keep demand subdued leading to lower inflation, higher unemployment and lower growth. Now, we are seeing outright deflation…

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Inflation target during deflation

Readers Question: How does inflation targeting operate when there is a deflation? and what are the problems associated with this? It’s a good question to ask at the moment, especially with regard to the ECB and Eurozone. Firstly, the EU inflation target is – below but close to 2%. If inflation falls below 2%, the Central Bank should pursue a loosening of monetary policy – lower interest rates (if possible), quantitative easing and allowing the exchange rate to fall. The ECB state By referring to “an increase in…