Thursday, February 26, 2009

Chilling economic charts: inflation

Gross domestic product across the Organisation for Economic Co-Operation and Development (OECD) countries fell 1.5% in the fourth quarter of 2008, following an 0.2% contraction in the third quarter of 2008. There are 30 member countries of the OECD, and according to the two consecutive quarters of negative economic growth definition, the OECD is in recession.

In continuing the series of really scary charts, which I have re-named chilling economic charts, I present what the world economic crash - of course, initiated here in the US of A - has done to global inflation rates. End result: the world recession is slashing inflation across the globe.

The West (or at least a proxy of it) is seeing disinflation (falling inflation) at alarming rates

This chart illustrates annual inflation rates across key Western economies through January 2009 if available. Across these economies (regions), annual inflation has been slashed an average of 1.6% in just one year to 1.3%, from December 2007 to December 2008.

Asia is not immune to the drag on inflation

This chart illustrates annual inflation rates across several Asian economies through January 2009. Annual inflation in these economies has been dragged down an average of 0.4% to 5.1% in one year, December 2007 to December 2008.

Emerging Europe is contracting and bringing inflation with it

This chart illustrates annual inflation rates across several several emerging European countries through January 2009 - all members of the European Union. On average the six economies experienced an average 2.4% drag on inflation to 6.1% in one year, December 2007 to December 2008.

Iceland is the opposite - inflation surged

This chart illustrates Iceland's annual inflation rate through February 2009. As you can see, inflation has surged almost 14% since 2007 to 17.6% in February. Iceland imports an average of 41% of its total GDP from other countries; and therefore, import prices drive the CPI. As a comparison, U.S. imports averaged around 18% of GDP over the last year.

In 2007 and into 2008, energy prices were rising quickly, driving import prices upward. But recently, Iceland's banking crisis has been coupled with a currency crisis. In January, Iceland's currency, the Krona, depreciated 71% over the year on a narrow trade-weighted basis. This had the undesirable effect of driving up import prices, and inflation spiked.

Statistics Iceland will not release its fourth quarter 2008 GDP report until March. However, the most likely catalyst of the disinflation, 1% from January to February, is a severe contraction in economic growth. Iceland's got a lot of economic problems on its horizon.

So there you have it. Around the world (mostly), GDP is falling precipitously and dragging with it, inflation rates. In the overly indebted economies (i.e., that of yours truly), this could present a real problem if deflation - falling prices - is persistent and broad-based, making servicing debt payments more difficult.

Wouldn't it be nice to see some positive economic news? If the answer to that question is yes, then you should visit this site, The Good News Economist.

Rebecca Wilder


  1. Rebecca - thanks for that "positive" link. They've been hard to find of late, which is one reason I've turned to a bullish bias after 11 years of a bearish one.

    Despite lousy-looking technicals, it's now just too late and too uncomfortable being a bear. There can't be more than a handful of people left on the planet who don't know how rotten things are and how even more rotten things are going to get. It's already priced-in. There must indeed be more mileage having a bullish bias from here, gradually easing into attractive situations - until and after, that is, we have say a 20% rally towards 9000 on the Dow. Then it gets really tough - depending on how high the interest rates/how bad the inflation prospects appear at that time!

  2. Rebecca, let's come back to this disinflation chart 1 1/2 to 2 years from now and see if the problem in the US and the world is global disinflation or even deflation or, on the other hand, will we be talking about high inflation. Looking at the Fed balance sheet, the US is looking forward to high inflation as soon as confidence in the banking sector is restored.

  3. Hi Stevie B. and Anonymous.

    I totally agree - in my book, inflation is the bigger medium term problem. When they need to (as credit markets heal, and the economy emerges from the depths), the Fed will extract the high powered base either (1) right on time, creating no inflation, (2) a little earlier and throwing the economy back into recession, or (3) waiting a little longer to avoid Japan. (3) is the most likely outcome; hence, with an infinitely growing balance sheet (seems like it at least, and the Fed has only just begun..TALF, MBS, etc.), inflation will probably rear its ugly head.

    Thanks for the comments!


  4. Thanks for the mention Rebecca...

    As you probably can guess, I am not as pessimistic that the Fed will be able to unwind what it is doing with its growing balance sheet. So far the fed has gotten it just about right in terms of growing the balance sheet. The Chairman has been a student of that all his life given his study of the great depression and how to avoid it. I have to applaud both administrations for their actions in the face of a highly charged political environment no less...

    In Ben's speech to the Senate committee earlier this week he made it very clear that they are monitoring each and every balance sheet action with an eye to what they need to do to unwind it when necessary. I doubt they will get it done perfectly, but the big difference today from any past examples is the availability of almost instant data... and their ability to counteract the results they are seeing...

    With respect to facts, data, and countermeasure: Ben is the master. With him at the helm I seriously doubt we will see either deflation or "the ugly head of inflation."

    Thanks again for including the Good News Economist website in your article.


  5. It's already priced-in.

    Hmm: I would not reach that conclusion until someone (pakistan/india) busts a nuclear cap in someones (pakistan/india) ass and the market does not fall further on the news!!!

    We still need to see a few of the weakest countries fail IMO. Maybe a default in Europe too; f.ex. Ireland!

  6. Just wait until we kill the rocket launch from N. Korea! There are so many fun scenarios floating around, don't you think?

  7. @fajensen - you may be right - things can go to excess excess. But it's really too late to sell more now if one has anything left. Drip-feeding money back to work on more bad news looks right, bearing in mind that there could indeed be one or more mega-cathartic, climactic events that mark an actual bottom.