Ask any consumer if they are worried about falling prices and they will give you a bemused smile and say “no”. In the experience of most of us, falling prices are only ever a transient effect, a pleasant and fleeting surprise. However, central bankers, being prone to ulcers, need something to worry about. The spectre of prolonged deflation in Western economies was seen in some quarters as a real threat to economic recovery since, in their minds, it could stifle demand whilst consumers patiently put off purchases against the day when the product is cheaper. This is to misjudge the expectation of instant gratification which has long since been a feature of Western consumerism – nobody keeps their old mobile phone because it still makes good calls (and takes decent pictures) when the latest gizmo hits the stores.
During the IMF’s spring meeting in Washington, it has emerged that concerns of many central bankers over the impending scourge of deflation have been allayed. In response to the gathering clouds of the deflationary storm, many central banks (further) eased their monetary policies; at least 30 nations have taken this path so far this year. This move is designed to improve liquidity and so create a degree of inflationary pressure and the IMF believes that this is starting to deliver results. As IMF deputy executive chief David Lipton noted: “The risk of that prolonged deflationary episode is diminished”.
The position of the ECB, to stimulate the Eurozone economy by injecting €60 billion a month into it through asset purchases is also intended to give a kick to inflation. Equally, the reluctance of the Bank of England, Federal Reserve (and ECB) to increase interest rates in the near future has the effect of not applying a brake to inflation – raising interest rates is a classic mechanism to curb inflation. It is debatable just how strong a drag a minor hike in interest rates would prove to be when they are at or near historic low values.
On the other side of the coin, low prices are likely to act as a stimulus to consumer spending as the glacial pace of the global recovery picks up, particularly in view of improved employment levels and increased wages.