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Weak Price Growth: Hallmark of the New Normal

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By Peter G Hall
Vice-President and Chief Economist Export Development Canada

‘Below target’. It’s becoming the annoyingly common anthem of statistical agencies’ press releases on price growth. Central banks are joining the chorus, which when played sounds like a dirge for prices that harmonizes closely with the well-worn tunes of the ‘new normal’, low-growth movement. Admittedly, singing upbeat songs about price stability is currently out of place, a clash with the facts. But does it mean that for the foreseeable future, we’ll all be listening to minor-key stuff?

Clearly it is a worry that five years beyond the crisis, price growth is as tame as it is. Worse yet, in many cases, recent monthly inflation is getting thinner. It suggests that, even with multiple signs of a return to growth, capacity is not being used up as quickly as thought, or at least there is little perceived tightening of conditions. That makes sense in certain economies, but not in others.

It could be a sign that psychology is playing a part. When you hear a certain tune for long enough, it tends to get into your head, and it’s hard to forget. Deflation – or more accurately, disinflation – could well be having the same effect. If inflation is tame and conditions seen to be uncertain, then we will all tend to hold onto our cash for longer. We’ll try to delay purchases (although 5 years on, it’s getting harder to do). Businesses will put off investing, adopting a ‘you first’ mentality that seems for the moment to be pervasive. But if this psychology is really anchored in the past, it risks blinding us to fundamental economic developments. The tunes of the past may well be drowning out the new ones.

The numbers themselves may be aiding this obfuscation. ‘All-items’ consumer price index (CPI) figures are the most recognizable inflation measure, and they are performing poorly. Indexes for the US, Japan, UK and the EU in general are below stated target rates, measured by current annualized monthly growth, and trending lower in the most recent months. The EU as a whole is dangerously close to zero growth. It’s pretty hard to argue against a trend like this. Or is it?

Go to the less-recognizable core measures of inflation, the ones that strip out the most volatile monthly price movements, and the story is quite different. In each of the above countries and regions, core inflation is on average quite a bit stronger than the overall measure. In Japan’s case, core growth has marked a significant departure from its recent trend, posting gains in five of the past nine months, and only two of the months saw outright declines. Admittedly, the core gains are still below central bank target rates, but they are still a long way from the deflation mark.

Crucial to the discussion is not where prices are, but where they are going. Our expectations can partly determine this, but other factors could quickly adjust those perceptions. First, industrial capacity has tightened, particularly in the US where strong underlying economic growth has used up most of the spare capacity that opened up during the crisis period. Second, most developed economies are facing tighter overall labour supply than prior to the crisis, thanks to the aging of their populations. Third, under-production and –consumption helped to soak up pre-crisis excesses, but now they are contributing to a growing demand-deficit, which could quickly spur more inflation – of both demand and prices – than most consumers and businesses are really ready for. Past post-recession periods suggest there can be a short price burst as economic growth gets going again.

The bottom line? Outside of Canada, gloomy tunes are getting lots of airplay on the inflation stations. Conditions suggest we could be hearing the more upbeat flipside sometime soon.


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