By Bernard Hickey
Who could possibly be against falling prices?
On the face of it most people love cheaper stuff.
Over the last couple of years consumers in New Zealand have relished walking into the electronics store or the phone shop or onto the new car yard to find prices have fallen and often sharply.
Statistics NZ figures for import prices show total consumer goods import prices fell 8% in the last three years.
Consumer durable import prices, which include the likes of mobile phones, computers, washing machines and clothes, fell 24%.
Passenger car prices fell 4% in the three years to September and a close reading of the motoring section shows that European, Japanese and Korean manufacturers have slashed prices again in recent months.
Peugeot, for example, is now offering an SUV for under NZ$40,000 that would normally sell for more than NZ$50,000. Its parent in France is having to dump cars in markets outside of Europe after sales fell as much as 40% in parts of Europe last year.
Japanese car makers such as Toyota and Suzuki are now selling their smaller cars for under NZ$20,000, including 15% GST, powered in part by a slump in the yen.
It's not just manufactured imports.
Total imported services prices, which includes all sorts of things from banking to travel, fell 6.6% in the last three years.
Travel prices fell 18%.
Prices of all sorts of things all around the world are falling, and its not just because of a 40% rise in the New Zealand dollar since early 2009.
Production capacity across Europe and Asia in particular has expanded massively over the last decade and at lower costs per unit as new technology was used and production moved to cheaper locations.
Demand in Europe, in particular, and America to a lesser extent, has also slumped.
That means too many products chasing too few buyers, which creates deflation.
It hasn't helped that central banks from Britain to America, Japan and China have been printing money at a rate of close to NZ$200 billion a month for the last year or so.
That is equivalent to New Zealand's entire economic output printed each month, which depresses the value of the currencies printed and increases the value of those not being printed such as New Zealand. Again, some might say, what could possibly be wrong with cheaper prices? If your income is rising or at least flat then your real purchasing power has increased.
That has been one of the arguments from some in our Government over the last year or so when asked about the lowest wage growth in over a decade. They argued that nominal wage growth may be weak, but everyone should 'feel the power' of the real wage growth.
What is unspoken is that the rise in the New Zealand dollar has helped increase that purchasing power, of imports at least.
But deflation is a problem for any economy if it becomes persistent and widespread and is combined with high unemployment. It encourages consumers to wait before purchasing.
After all, why buy something now if you know that it will be cheaper and you can buy more of it in future?
If everyone delays purchasing at the same time then demand falls, prices are cut again and the economy enters into a deflationary cycle.
One particularly dangerous consequence is the resulting fall in profits when prices fall fast, which encourages employers to lay off staff and cut wages.
That cycle of cutting prices and wages can then spiral into something more dangerous, the likes of which we haven't seen since the Depression of the 1930s.
This fear of deflation is exactly why the likes of Japan and America have been printing money and why the continental Europeans have started openly talking in recent weeks about starting printing too.
They are desperate to create inflation again.
Down in our part of the world there seems to be less of a worry about inflation, even thought it's been below the bottom of the Reserve Bank's 1-3% target range for most of the last 18 months and is at its lowest point since the Depression.
Even on Friday, the bank warned again it need to be careful to 'anchor' inflationary expectations.
Consumer price inflation, as opposed to asset price inflation, is the least of the world's worries. There are some immensely powerful structural forces driving down consumer prices and bearing down on wages for the majority all around the world.
The coming globalisation of services into the cloud has yet to really hit, the ageing of populations in the developed world is bearing down economic growth rates and an epic shift in the income share from wages to profits in the Northern Hemisphere are all sucking any heat out of prices.
The Reserve Bank is widely expected to warn again this coming Thursday that it will have to increase interest rates next year to contain consumer price inflation. The central bank and most bank economists have warned about higher interest rates again and again over the last five years.
Yet they have been surprised time and again in recent years at the sheer weight of the deflationary forces of ageing, globalisation and new technology, which are changing many behaviours all around the world and in New Zealand.
Young people are choosing to travel online via their cheap gadgets than actually buy more expensive petrol.
Consumers are buying imports and travelling overseas rather than buying and travelling locally.
Employers are looking to casualise their workforces and reduce benefits to grow their profits.
Many are looking to reduce costs by moving to robots or into the cloud. All of these forces reduce prices, costs and wages for the middle to lower income groups.
Our policymakers are still fighting the inflationary battles of the 1970s, 1980s and 1990s when the real battle in the years to come all over the world is with consumer price deflation.
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This is an expanded version of an article published by the Herald on Sunday. It is used here with permission.
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