Sunday, April 26, 2015

2015-03 Relative Price Trends

Consumer prices increased 1.40% year-over-year in March, whereas purchasing prices fell 5.70% over the same period.  Based on this metric, China is in its 40th month of economic contraction.
The consensus seems to be that the market is misbehaving and can only be brought back under control by the central bank.  Alternatively, the central bank is misbehaving and can only be brought back under control by the market.  Deflation is not bad, it is simply a process to correct mistakes made in the past.  A Reuters article touched upon this issue, but missed the point.
Policymakers have publicly expressed worry that the risk of deflation is rising for the world’s second-largest economy, as the drag from a property market downturn and widespread factory overcapacity is compounded by an uncertain global outlook and soft commodity prices.
No mention is made of the factors that caused an overheated property market and excessive investment in factory capacity leading up to this moment.  There is some hope for financial journalism, because at least some positive aspects of deflation were mentioned.
[W]hile lower commodity prices have punished the extraction and power production sectors, the pain is not felt across the board, as some companies have taken advantage of lower input costs to maintain profit margins.
Unfortunately, influencers within the financial industry are either unaware of or reject the theory that money is not neutral.  Two representatives of Australia and New Zealand Banking Group made this ridiculous comment:  "[O]nly permanent liquidity injection will be able to sustain the current favorable monetary conditions to head off the risk of deflation."