Filed under: International News
The world is changing so quickly that we will soon be suffering from psychological vertigo. Consumer prices in the US fell last month – by 0.1 percent on a monthly basis and by 0.4 percent on an annual basis.
Kevin Lings, an economist at Stanlib, points out that consumer inflation was at 5.6 percent as recently as July – the highest since January 1991. For last year as a whole, US consumer inflation averaged 3.8 percent, up from 2.9 percent in 2007 and 3.2 percent in 2006. The latest figure, says Lings, represented the first negative annual rate of change recorded in the US since 1955.
The US is not the only country facing deflation: China and Japan are also fighting falling prices.
The switch from inflation through disinflation to deflation started late last year, when energy and other commodity prices started falling. It sped up when US bank Lehman Brothers filed for bankruptcy in September. As banks stopped lending, demand contracted sharply, and prices of many goods stopped rising or began falling.
When inflation starts to subside – disinflation – consumers benefit because it increases their disposable income.
It encourages them to buy a broader range of products. That’s what happened in the early part of this decade, contributing to the global boom.
But once confidence is damaged, people are afraid to spend. They use the extra money to pay off debt or put away cash in case the worst of all possible worlds we seem to be living in continues for some time. That’s when disinflation turns to deflation, which usually leads to job losses as firms become unprofitable because they can’t cover their costs.
It’s difficult to plot a course through this unpredictable world.
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