David Smith of the Sunday Times writes: “HOW TO PREVENT GOOD DEFLATION TURNING BAD”:
A few weeks ago I wrote here about “good” and “bad” deflation, a distinction which many have taken up. Good deflation arises from a favourable international price shock, the kind we are seeing with the sharp fall in the price of oil and other commodities. Bad deflation arises from weak demand.
Is that so? The charts give rise to another conclusion: It´s mostly bad!
In the US, as soon as the 2% target became official policy, inflation dropped and remained below target
While oil prices were stable, only falling after mid-2014
The same pattern is seen in the Eurozone, with inflation falling long before oil prices tumbled
If the fall in oil prices reflects a positive supply shock, we wouldn´t necessarily see the same drop in commodity prices, unless the oil price drop mostly reflects a fall in AD growth. And that seems to be the case, i.e. “bad deflation”!