Nadácia United Philanthropy - Kampaň na dve percentá

Lady Deflation has been Staying with us and we have not Noticed

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Peter Bobik
Consultant
Bratislava, Slovakia

In July 2016, year-on-year inflation was -0.9%. According to the Statistical Office of the Slovak Republic. Prices have not grown since the end of 2013. For the third year in a row now we have had deflation here – a phenomenon that equals plague in the economic community. Deflation stopped the hard working Country of the Rising Sun in its expansion for a whole generation; fear of it made the leaders in the biggest economy act fast and completely outside their usual standard procedures in 2008. Is there a reason to panic then? Oh, no.

 

We are an original country and this is just one example of our uniqueness. We are not afraid of deflation – we do not even see it. At a microeconomic level, where life happens and the world is colorful, it looks like this. Vast majority of people when about prices’ rise in Slovakia, will answer: “They rise fast.” Every survey like this on TV makes me self-reflect… what a self-deception. And then I open the discussion under an article in an influential newspaper with information about falling prices (deflation) and I start to see reality. Participants are strongly irritated and outraged that anyone can write something like that. That is a lie, vox populi says.

No, I do not want to discuss this indicator and its accuracy. There is something else, I want to point out. According to consumers’ opinion, there is no deflation here. They see inflation, and most of them consider it to be higher rather than lower. When considering the consequences, this is the core element. Deflation is harmful mostly because of behavioral changes of economic subjects which expect prices to fall. Households postpone their spending, companies do not give pay raises to their employees, they wait with investments and reduce their staff… government cuts expenses, awaiting recession… But none of these is happening. Not one option, rising out of fear of deflation. Hosanna. This is definitely a reason to celebrate. But, there is a question: What will happen next, how will this party go on?

In theory, deflation should bring destruction if economic subjects start to expect it. No need to say more, we should be scared. And what if deflation comes and the subjects behave as if in an economy with rising prices? This is a topic for economic research and super-computer modelling. The answer would take years, so let us think. Falling prices enable the consumption to rise, rising consumption increases optimism, optimism fuels consumption. Low interest rates increase consumption… This fast reflection leads me to a surprising perspective. We are in an environment with several factors stimulating the economic growth in the same time. Factors that in theory negate each other. So the consequences should be surprising, too. What lies ahead?

Although it does not sound likely, economic growth acceleration rather than slowdown. Faster fall of unemployment than the predictions extrapolate from previous development and… rise of risks. This can show somewhere after some time (but it does not have to). Maybe we will be beneficially-economically-blind… long-term. One of the risks can be dramatic price growth of a certain important asset, where the demand will make the price jump up (real estate?). It will be very interesting to watch the reality of deflation in non-standard expectations it brings – maybe we will re-write some economic rules.

 

If you decide to behave in a standard way, slow down the consumption and get ready for the risks or you will enjoy the boom, you are not behaving irrationally. This is an easy choice. So, choose…

 



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