20 Oct 2014

Deflation risk rising amid slow growth

6:58 am on 20 October 2014

Inflation is disappearing, and economists are wondering where it has gone. And with fears rising about slowing global economic growth, the menace of deflation, or falling prices, is starting to haunt policymakers.

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Deflation can be harmful if it encourages shoppers and firms to delay their spending. Photo: PHOTO NZ

Oil prices have fallen sharply, with brent crude oil plummeting almost a third since June, to $US83 a barrel last week.

Fuel prices at the pump have fallen only a fraction in comparison, but the concierge at Z Energy's Harbour City station, Tony Albano, said customers appreciate the drop.

"Customers are always happy when the price is coming down. Especially when they arrive and you say just hang on a minute, and I'll save you two cents (a litre). They love it!" he said.

Price falls can be beneficial, such as those for fuel, as they allow households to stretch their budgets further.

But deflation can be harmful if it encourages shoppers and firms to delay their spending and investment plans because they think prices will be cheaper in the future.

Tim Condon at ING Bank in Hong Kong said Japan's experience of it has resulted in sluggish economic growth for most of the past two decades.

"The world is heading toward mild deflation, the kind of thing Japan went through in the 2000s. It's not bad. It's not virulent deflation like in the Great Depression," he said.

Europe and Japan are seen at most risk of deflation, where policymakers have struggled to counter slow growth.

ANZ Bank chief economist Cameron Bagrie said globalisation, advances in computing and information and communication technology, high debt and high unemployment have undermined the efforts of central banks.

"Central banks would actually like to see a little bit more inflation, because of course they've been pump priming the global economy. They've had interest rates at record low settings and despite that we just not seeing that general inflation story evolve," he said.

NZ inflation weak

Deflation is not expected to hit New Zealand's economy, however Mr Bagrie said the fast growing economy has not generated the wage or price inflation many economists had warned against.

"And that is despite the general consensus ... we've got demand outstripping supply. Normally in that type of situation you start to see inflation pressures ... build. Certainly in some sectors such as construction there is a reasonable inflation story. But beyond construction, the overall inflationary dynamic is very benign," he said.

Figures out later this week are expected to show annual inflation just above the bottom end of the Reserve Bank's one to three percent target band.

The economist at the Council of Trade Unions, Bill Rosenberg, said it raises questions about the wisdom of the Reserve Bank's obsessiveness in hiking interest rates earlier this year, rather than tackling the particular sectors where prices had risen sharply.

"There really isn't an inflation problem ...We've got other problems, like the high dollar and very uneven economic growth that are much more important to address than inflation at the moment," he said.

Low inflation has many economists delaying their own expectations about when the Reserve Bank will resume raising rates.

Only a few months ago, the central bank was expected to move in March. Now ANZ's Cameron Bagrie is picking it won't be until late 2015.

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