Sunday, May 10, 2009

Inflation, stagflation or deflation?

According to the OECD, in March inflation rate across global economies is at the lowest level for past 38 years. Consumer prices of thirty OECD countries increased during the twelve months ending on 31 March by 0.9%, the lowest level since 1971. In contrast, even in July 2008 the inflation rate within the OECD countries at 4.8%, which was the biggest jump over the past 11 years.

Recent numbers support the view that the main threat for the world economy remains deflation - situation in which there is an absolute decline in the price level. While short-term deflation is not in principle problematic - it is good news for consumers (but not for manufacturers, which pushed the margin), fall into deflationary spiral is negative news for the whole economy - usually including increased uncertainty affects the allocation of capital and wealth between debtors and creditors, etc. The massive monetary stimulation of the U.S. economy and some other developed countries, but increases the likelihood of increasing future inflation (if it manages to revive the world economy), or even stagflation (e.g. sharp rise of commodity prices) - a combination of high inflation and economic stagnation. And as shown by the latest numbers in OECD countries since June last year to March 2009, the situation is changing very quickly.

The dilemma regarding the future evolution of prices also apply to individual countries - already are differences within the OECD noticeable. At this time, Iceland continues to hold by far the highest annual inflation rate to 15.2%, while Ireland is at the opposite end with prices falling by 2.6%. Prices are according to the OECD report also lower than the year before in Japan, Portugal, Spain, Switzerland and the USA.


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