cardboardbox?Youwerelucky
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Deflation is the BIG worry not inflationAnother interesting article
| Quote: | The real danger right now, is that we could be worrying about the wrong thing.
Last week, the British Retail Consortium said that food inflation in the UK had hit 7 per cent in May, from the year before.
Unless you have just arrived after spending the best part of the noughties on Mars, you will know the price of oil has been rising quite a bit of late. In fact, a couple of weeks ago it went close to $150, meaning that it has almost quadrupled in price since the time we first started taking about how expensive oil is getting.
The Bank of International Settlements, which is a little like the central bank to central banks, thinks interest rates should go up around the world, in order to curb demand for oil.
Yet, consider this. Last week, Bloomberg quoted Societe Generale’s Albert Edwards, a highly respected global strategist, as saying, “Inflation fears are overdone and the deflation threat could reappear, prompted by a global recession and collapse in the commodity bubble.”
But Mr Edwards is not alone; earlier this month, three economists produced a report warning that deflation was more likely than runaway inflation.
We have argued here before that the price of oil is bound to fall back eventually. It is just not affordable at current levels. Sure, in China and other Asia countries oil is heavily subsidized, distorting the market, but countries such as China are heavily reliant on overseas trade. And these days trade is a complex affair. Raw materials are shipped from one country to another. Component goods might be made in one country. Another may actually carry out the assembly. When trade is like that, the cost of transporting goods is key. And while shipping costs are quite modest, there is a real danger that oil at current prices will hit export countries hard, regardless of their internal subsidies.
In the US and UK, there are signs that high oil is hurting everywhere, including on the roads, where demand for fuel efficient cars is rising, while sales of big gas guzzlers are falling as fast as house prices.
Oil will surely fall back eventually. So too will the cost of food. Surely bad harvests can not continue. Surely, at current profitability levels, farmers will invest more in improving productivity.
Russia has the potential to become the world’s food basket. An opportunity it is sure to make the most of, by ramping up production.
There is no sign of wages increasing. Instead, unions are more worried about job losses.
Meanwhile, the economic slowdown in the West is sure to lead to lower demand, which usually leads to lower inflation.
Take as an example, this report from Verdict. Last week, Verdict said, “British consumers are more disloyal than ever before with the retailers they use.” Its research found that across retail as a whole, some 10.8m shoppers are disloyal to the stores they use; and, across every retail sector, more consumers are saying that they would prefer to use an alternative store to the one they currently use most.”
In other words, retailers can not rely on loyalty like they used to. This means they have to look at ways of ensuring their customers come back. Price will surely be their key weapon.
Bear in mind, it takes time for a change in monetary policy to influence inflation. What the Bank of England does now, will influence prices in two years’ time.
Maybe, then, it is time to slash rates. Maybe now is the time for the government to scrap Gordon’s beloved rules of prudence and borrow money to fund tax cuts to try and kick life into the economy.
Deflation is much harder to fight than inflation. The time for that battle to begin is very soon. |
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Garp
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Most of that goes over my head mate. From my perspective, and I admit this is short term, but I quoted 90% of this years business on last years prices. My business is food, cooking and delivering. Food costs are up in double digits for many products, energy costs are up in double digits, and transport costs are up in double digits. By my reckoning, I will be lucky to break a single digit profit margin this year because of inflation. Next year will be worse.
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