Should We Worry About Deflation
Thursday, October 15, 2009 8:49
Despite the stubbornness of consumer price index inflation–the measure relevant to the conduct of the Bank of England’s monetary policy–to drop speedily, the Governor and a few of his colleages fear that the inflation risks are stacked on the downside. Deflation itself is not mentioned in the monetary policy committee’s August minutes, nor in the Governor’s statement that accompanied the recent release of the BoE’s quarterly Inflation Report.
But what he had in mind when he commented on the 4% fall in nominal aggregate demand was that, if it persisted, it would be inconsistent with meeting the inflation target in the medium term.
You may ask what does this mean for the UK? But we’re part of a global economy, so if we’re talking about markets, we’re looking at the global economy, just as we do when we consider the FTSE 100. In this context, deflation is now in the headline indices. It’s in China, Japan, the US, Canada, the Eurozone and in the UK, if we look at the retail price index.
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