Analysts Warn of Deflation

November 11, 2008 New Zealand Finance  No comments

Analysts are beginning to warn of possible deflation dangers.

Amidst interest rate cuts from around the world, some analysts are predicting possible deflation in the coming future. Technically, deflation is the opposite of inflation, it is the increased valuation of money, leading to falling prices and decreased economic activity. Subsequently it can lead to increased reliance on debt and in general an unpleasant economic outlook.

At the early stages of the current economic downturn, arguments for or against possible deflation are likely to be moot, as the exact effect of current events is still uncertain, the time horizon for returning to “normality” is unseen and there is little if any event which can be used as a comparison.
The Westpac Economic Overview for November mentions that inflation could reach as low as 1%, but makes no comments to deflation, and predicts that inflation will be in the Reserve bank preferred band of 1%-3% in the near future.

From a more academic perspective, some, like ANZ chief economist Cameron Bagrie have mentioned that deflation is a typical product of an economy moving from the recession state to that of depression. This view is supported by the rapidly decreasing fall in oil prices seen recently, and the current interest rate activity.

Although, the fears of recession could just as easily be placed on the uncharted nature of the current situation and the drastic actions taken by banks and governments. Even ANZ chief economist Cameron Bagrie has said that it would be a big leap to call the current disinflationary environment a deflationary one.