The case against deflation... from one analyst

The Globe & Mail quotes a Scotia Capital analyst's arguments against deflation. Derek Holt, the Scotia Capital analyst, gives the following reasons [my comments in square brackets in italics]:
  • "Goods price deflation was what the 1930s was all about. Today's U.S. economy is two-thirds service sector oriented, and service sector prices are stickier than tradeable goods. Have the prices you pay for hair cuts, the trades, and auto repair fallen like the prices of flat screen TVs?" [I don't think there is any evidence of this. About 60% of Japan's GDP is consumer spending and about 66% is the service economy and prices have actually fallen in Japan in the last decade.]
  • "Main street doesn't believe it. Price components to consumer surveys like the Conference Board's consumer confidence index point to inflation expectations that are far removed from the price pressures economists point to in CPI releases. As such, there is no evidence right now that households are beginning to formulate expectations for falling prices across a range of goods and services." [This is a reasonable argument against deflation. Inflation expectations are a key part of the matter and if consumers and investors don't expect it, it may not materialize.]
  • "Emerging markets may be the safety valve against global deflation risks today, versus their absence in the 1930s Western-dominated global economy that was the only game in town back then. Price pressures in emerging markets are not typically acute right now, but higher than in developed economies, and often occurring behind fixed currency pegs. The pressures to possibly pass on higher costs through trade linkages into the developed economies today are more material than the 1930s." [EM suppliers had an aweful tough time passing along cost increases when the US economy was stronger 5 years ago and if anything, they will have an even tougher time now.]
  • "The spread between nominal and real U.S. Treasuries has narrowed so sharply not just as a bet against inflation or a bet in favour of deflation, but also because the nominal benchmark gets an added boost from the liquidity premium compared to less liquid real bonds that don’t perform as well on safe-haven flows.[I don't buy this. Long term Treasuries are definitely more liquid but I would say stocks and some corporate bonds are also very large markets.]
  • By setting a series of low year-over-year inflation readings in the near-term, then one or two years down the road the readings get a mild lift from the weak base. [True]
Anyway, I like considering people who takes opposite views from me so I thought I would throw this out at you. It's always worth considering your opponent's views.


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