Thursday, May 19, 2005

As the header on this blog indicates, the name of the game in today�s global economy is glut � generalized overproduction. The natural symptom of overproduction is price disinflation or outright deflation at the consumer level. As too many goods and services chase too few dollars (or euros or, as we see today, renminbi) in the hands of consumers, down come prices. And as prices stay low, central banks find the justification to keep interest rates down as well. The result is the odd combination we see today � nearly non-existent consumer inflation combined with out-of-control asset inflation.

Have a look at consumer inflation data in the major national economies. Thanks primarily to energy prices, CPI in the US is currently running at a 3.7% annual pace, but core CPI is a mere 2.2%. The recent energy price hikes have the 3-month annualized rate at a rather torrid 6.6%, but core inflation remains a rather reserved 2.2% annualized. That�s two consecutive months of disinflation in core prices and an amazingly stable ~2.2% core inflation rate over the last six months. If you don�t like the CPI data, try on Personal Consumption Expenditures inflation for size which calculates price changes over the entire consumer end of the economy rather than through a basket of �typical� consumer goods. According to the latest PCE data, the overall annual inflation rate is a comfortable 2.4%, while core PCE inflation is running at a mere 1.7%, a rate stable since November.

The story is much the same in Europe. In April the HICP in the EU-15 was running at a tepid 2.0% annual rate and only slightly higher (2.1%) in the eurozone. In the three biggest European economies April inflation rates were 1.0% in Germany, 1.5% in the UK and 1.9% in France. Note that all these rates include food and energy as well; their core rates are surely much lower than even this, dangerously close to or even below the deflation stall speed of 1.0%.

It goes without saying that Japan is still experiencing consumer deflation and even China�s torrid economy is cooling off � at least on the consumption side.
According to Chinese figures released this week, inflation has slowed significantly - with consumer prices just 1.8 percent higher in April than a year earlier. Inventories of unsold goods are rising at steel mills and other businesses, and imports of iron ore and many other raw materials have slipped. While exports remain extremely strong, domestic economic activity has moderated.

Beijing officials have imposed administrative measures that seem to have been surprisingly effective in controlling a potentially overheated economy and inflation.
Chances are that the June meeting of the Federal Reserve will produce the last 25 basis-point rate hike for the near future. With all the gloom coming out of the UK�s high street and housing markets, a rate cut is even in the cards from the Bank of England. It would be suicidal for the European Central Bank to hike interest rates in the midst of Germany�s economic funk, and thanks to continuing price deflation nominal interest rates will remain near zero for some time to come in Japan.

More cheap money to fuel more property bubbles; more consumer price disinflation keeping the masses satiated with cheap stuff. The formula which has defined the 21st century thus far promises to keep performing for a while more yet.

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