Friday, October 22, 2010

The Perplexing Path of Prices

(Export Development Canada – Peter G. Hall)

It’s easy to get dizzy tracing the recent path of prices. General price movements have oscillated from inflation to disinflation and back again over the past two years. Earlier this year, strong growth rekindled inflation worries in many economies, prompting much discussion about the unwinding of loose monetary conditions, and resulting in tightening actions by various monetary authorities.

Well, it’s time to buckle up again. Price growth is tumbling in the world’s big industrial markets, and the language in key speeches has shifted from inflation back to disinflation – with occasional reference to the dreaded ‘D’ word. Is price softening here to stay, or is this just a short episode?

One or two months of weakness wouldn’t warrant all the worry. But the fact is, meagre monthly price increases have already persisted longer than common definitions of ‘short’. The U.S. consumer price index (CPI) has averaged 1% annualized growth for the past 10 months, while at the same time core inflation has averaged just 0.7%.

Meanwhile, Germany is averaging 1.1% CPI growth, but core prices have been dead flat. France has been extremely weak for six months, and Japan has seen outright declines in CPI in five of the past eight months. Canada is no exception, as both headline and core CPI have been very weak for six months. Among large nations, UK prices are the sole anomaly.

Read more or watch the video here.