2002 November 13 Wednesday
China And Japan Experiencing Deflation

Prices are falling in China:

China's benchmark consumer price index fell 0.8 per cent in October from a year earlier and dropped the same amount in the first 10 months, the State Statistical Bureau said yesterday.

That was a slight moderation from the 0.7 per cent dip in September from a year earlier, and on par with a 0.8 per cent fall in the first nine months.

Japan is now in its 4th year of declining prices:

Japan's economy and banking minister said Wednesday that deflation has worsened more severely than the government had expected, hampering the disposal of nonperforming loans.

"Because of deflation, more nonperforming loans have been generated and that has accelerated deflation," Heizo Takenaka said in a Lower House committee session. "That's why we need to speed up the bad-loan disposal process," he said.

Jesper Koll, chief economist at Merrill Lynch Japan Securities Co., sees considerable risk for deflation in the US:

Deflationary realities are all over the U.S. economy. By mid-2002, goods prices for consumers were falling at an unprecedented rate of almost 2 percent. Service prices were still rising, but this is mostly due to the imputed rent calculations as well as high measurement error for services.

For example, the true cost of services offered is falling much faster than measured because service providers are offering extended "free" service periods. The only true price that did not fall is the oil price, but oil is a "Terror War Premium," not the start of a new secular inflation trend.

But Alan Reynolds does not see a risk of deflation in the US:

It would be difficult to retell that story about the U.S. today. The fed funds rate is 13/4 percent and producer prices were essentially flat over the past year, if you leave out food and energy. Subtract almost any other measure of inflation from the fed funds rate, and it is hard to argue that real, inflation-adjusted interest rates are much too high. The Economist's index of commodity prices is up 21.2 percent over the past year, gold is up 13.4 percent, and oil is up 28.9 percent. That makes it quite challenging to argue that falling commodity prices are signaling a broader price decline ahead. The same journal's measure of the dollar exchange rate has dropped from 119.6 percent to 115.1 over the past year, making it equally tricky to argue that the dollar is rising too fast. The producer price index fell in September. But if you leave out food, the index rose from 136.3 in January to 139.3 in September.

Share |      By Randall Parker at 2002 November 13 02:44 PM  Economics Political


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