DEFLATION IS POSSIBLE BUT

INFLATION IS ALMOST
IMPOSSIBLE IN DEVELOPED
COUNTRIES
SUBMITTED BY:
RUHINA DHAWAN(33)
SAKSHI KHANNA(34)
SANDEEP MALHOTRA(35)
SHILPA SRIVASTAVA(36)
SHRUTI GUPTA(37)
 INFLATION
“
Inflation is when you pay fifteen dollars for
the ten-dollar haircut you used to get for fiv
e dollars when you had hair.
” 

Sam Ewing quote

 DEFLATION

In economic term, ‘deflation’ occurs when

the inflation rate falls below zero percent,
resulting in an increase in the real value of
money.
 TOPICS TO BE COVERED
Deflation in UK
Deflation in Japan
Deflation in USA
Trends in India
Trends in China
Conclusion
 DEFLATION
IN
UNITED KINGDOM
OVERVIEW OF UK ECONOMY

The UK is the fifth largest economy in the

world, with a gross domestic product(GDP)
of US$2,727 billion (Source: World Bank,
2008).

It has a population of 61 million (Source:

ONS, 2008),

It was the second largest recipient of

foreign direct investment (FDI) globally in
2007 (Source: UNCTAD, 2008),
It is a leading global trading nation, being the second
largest exporter and third largest importer of
commercial services, and the seventh largest exporter
and fourth largest importer of merchandise (Source:
World Trade Organization, 2008),

UK is a member of the European Union, the world’s

largest trading entity, with nearly 500 million
consumers and a GDP of approximately
US$19,000 billion (Source: Eurostat, 2008),

It has low unemployment (with an unemployment

rate well below the European Union average
MARKET SITUATION…
 CAUSES

Sub prime loan crisis… lead to falling

household prices.

Falling interest rates

EFFECTS OF DEFLATION
Postponement of demand.

When prices and wages fall together..

It further becomes difficult for an
economy to sustain..

Lower profit margins

Confidence and saving

 FORECAST…
UK is expected to be in deflation for two and
a half year or so -------- THE TELEGRAPH
because the RPI has dipped to negative for
the first time in almost half a century.

GDP to contract by more than 4% this year

and further by 1% in 2010.

Unemployment rate to surge above 12%

 How to Overcome…
Just like USA and JAPAN…. UK also
injected money in the economy by printing
fresh currency.

It bought the outstanding and private sector

debt ( lending money to banks)

Printing of fresh currency is not a long term

safe measure…. Because it may lead to
galloping inflation.
“They are aware of deflation risk. They are
cutting rates very fast & if necessary they
too will turn to helicopters but in the end
they will keep the wolf away from the door”
DEFLATION
IN
USA
 USA
The United States of America (US or USA) has the world’s largest economy. According to the CIA
World Factbook, 2007 GDP is believed to be $13.84 trillion. This is three times the size of the next largest
economy, Japan, which has a GDP of $4.4 trillion.

The recent failure in the US housing and credit markets have resulted in a
slowdown in the US economy. 2007 GDP growth was estimated at 2.2% but in
2008 it is projected to be just 0.9%, down from the 10-year average of 2.8%.
 Deflation In USA !!!!
There have been three significant periods of deflation in the United
States.

The first was the recession of 1836, when the currency in the United
States contracted by about 30%, a contraction which is only
matched by the Great Depression. This "deflation" satisfies both
definitions, that of a decrease in prices and a decrease in the
available quantity of money.

The second was after the Civil War, sometimes called

The Great Deflation. It was possibly spurred by return to a gold
standard, retiring paper money printed during the Civil War.

The third was between 1930-1933 when the rate of deflation was
approximately 10 percent/year, part of the United States slide into
the Great Depression, where banks failed and unemployment
peaked at 25%.
 There was sharp deflation in the US (1929-33),but a strong recovery as the price level
stabilized.

 Throughout the history of the United States, inflation has approached zero and dipped
below for short periods of time (negative inflation is deflation). This was quite common in
the 19th century and in the 20th century before World War II.
 Some economists believe the United States may be currently
experiencing deflation as part of the financial crisis of 2007–2009.

As Consumer prices dropped 1 percent in October, 2008, largely due to a

steep decline in energy prices. .This was the largest one-month fall in
prices in the US since at least 1947.

That record was again broken in November, 2008 with a 1.7% decline. In
response, the Federal Reserve decided to continue cutting interest rates,
down to a near-zero range as of December 16, 2008.

 Some economists believe over the next two years deflation in the
United States may lead to a deflationary spiral that could bring the
U.S. into the next Great Depression.
 Why have many US companies been
concerned about deflation?

• There is no stable competitive equilibrium in industries

with high fixed costs and low marginal costs – steel,
autos, chemicals, software, computer chips, airlines and
others.

• Unless companies can achieve a stable pricing structure

or establish unique products, they will lose money. The
airline industry has never earned a normal return on its
capital. DRAM makers are likely in the same situation.

•Increased global competition has undermined established

pricing practices in many industries. Things have been
changing for several years, but a weak world economy
and a strong US dollar have intensified the effects.
 OBAMA said that:

I believe that the current deflation

Scenario is a perfect example of investor
irrationality.
Any investor who is looking for glory
days in his future should try to take
advantage of this irrationality, by going
against the short-term trading crowd
and accumulating positions in TIPS
directly and by purchasing some
commodities.
DEFLATION
IN
 DEFLATION :
Is not a new phenomenon for global world.
Great depression in 1930s was
DEFLATION
What is DEFLATION???
It is a decline in general
price levels,often caused by reduction in
supply of money or credit.
It can be brought about by reduction in
government spending,personal
spending,investment spending.
 Falling prices are good for an
economy???
Positive factors:
Increases purchasing power.
Increases demand.
Negative factors:
decreases prices and it leads to
decrease in wages.
increase in unemployment.
decrease in asset prices.
 Deflation in Japan:
In 1930s in Japan,deflation reflected
economic collapse and rising
unemployment made worse of economy
which was called
LOST DECADE (1991—2001).
Similar trend is visible in emerging
economies also like china, inflation was
8.5% in april but in november it was 2.4%
 After effects of Deflation in
japan:
Increase in unemployment level.
Decrease in GDP.
Decrease in consumption level.
Decrease in asset prices.
Level of demand.
Fall in prices.
 The Japanese Slump

Table 22-4 Output Growth, Unemployment, and Inflation, Japan 1990-

2001
Year Output Growth Rate (%) Unemployment Rate (%) Inflation Rate (%)
1990 5.2 2.1 2.4
1991 3.4 2.1 3.0
1992 1.0 2.2 1.7
1993 0.2 2.5 0.6
1994 1.1 2.9 0.1
1995 1.9 3.1 0.4
1996 3.4 3.4 0.8
1997 1.9 3.4 0.4
1998 1.1 3.4 0.1
1999 0.8 4.1 1.4
2000 2.8 4.7 1.6
2001 0.4 5.0 1.6
2002 -0.3 5.4 -1.2
2003 2.7 5.3 -2.5
2004 3.0 5.0 1.8

© 2006 Prentice Hall Business Publishing Macroeconomics, 4/e Olivier Blanchard 27 of 44

Table 22-5 GDP, Consumption, and Investment Growth, Japan, 1988-1993

GDP Investment
Year (%) Consumption (%) (%)

1988 6.5 5.1 15.5

1989 5.3 4.7 15.0

1990 5.3 4.6 10.1

1991 3.1 2.9 4.3

1992 1.0 2.6 7.1

1993 0.2 1.4 10.3

Fundamental Drivers of deflation trend
in Japan :
DEBT: prices decreases and old debt stay
fixed,companies may be facing difficult
times in repaying these debts and it leads
to bankruptcies and increase in
unemployment .banks would suffer more
loans losses and if wages reduces same
will be with house holds.
Deffered spending: if people believe that
prices will be lower next month,they may
wait to buy and if too many shoppers
wait,the economy would coil downwards .
 Why Japan’s economy has fallen
on such hard times,and why has
recovery taken so long?
Surplus in savings.
Policy mis management.
Structural problem.
Yen appreciation.
Global capital flow.
INDIA
The deflationary potential is historically large...we
risk overwhelming deflation in every corner of the
globe.”

-By Bob Prechter

 INDIA

In Layman terms, inflation is a generic increase in price

levels and deflation is a general decrease in price levels (of
goods and services).

For example - In an inflation type scenario, goods priced at

Rs. 100 at some base year say 2000 would now be Rs. 110
and in a deflation type scenario, they will be Rs. 90.
 India : Vacillating from inflation to deflation

Couple of quaters back economists were crying hoarse about the

double digit inflation which was perceived as the single biggest
threat to the government. As the elections are less than a month
away, we see a real possibility of India plunging into deflation
Inflation at 0.26%for week ended 14th mar 09
food prices continued to be high with food grains
Roughly 9% costlier than a year ago,hence it is a
paradoxical situation for consumers that they
Heard of zero inflation but still price of groceries
Are increasing
 What were the causes of inflation in India?

TWO MOST IMPORTANT CAUSES ARE:

1. Demand pull INFLATION - This is basically when the
aggregate demand in an economy exceeds the
aggregate supply. It is also defined as `too much
money chasing too few goods'. Bare-boned, it means
that a country is capable of producing only 100 items
but the demand is for 105 items. The more demand
there is, the costlier it becomes for example GOLD
2. Cost push INFLATION – Due to increase in the price of
various inputs like raw material or semi finished goods,
wages of the labour , interest rate on loans and
borrowings etc and hence these cost push factors have a
direct impact on the price of a particulare product

As the aggregate supply

curve shifts from AS to AS1
(decrease in supply) but
aggregate demand remains
same price level increase
P to P1 but the output reduces
from Y to Y1
 What are the causes of deflation in india?

FACTORS CAUSING DEFLATION ARE:

1. The supply of money goes down.

2.The supply of other goods goes up.

3.Demand for money goes up.

4.Demand for other goods goes down.

 EFFECTS OF DEFLATION…
1. Decrease in Aggregate demand

2 Reduction in Velocity of money

3. Devaluation of Currency

4 . Less Investments

5 . Transfer of wealth
 Inflation in india(95-06)

7
6
5
4
3
2
1
0
95- 96- 97- 98- 99- 00- 01- 02- 03- 04- 05-
96 97 98 99 00 01 02 03 04 05 06
inflation…
CHINA
 CHINA-SOME FACTS

POPULATION, 2009
1,329,740,000
UNEMPLOYMENT RATE, 2006 4.3% (official); 17% (unofficial )
INFLATION 4.9% (CPI: 8.7%,Feb 07 - Feb 08)
4.5% (2007 av)
1.7% (2006 av)

GDP (PPP) (2008)

$7.8 trillion
GDP BY COMPONENTS (2006) Private consumption (36.4 %)
Government consumption (13.7 %)
Gross fixed investment (40.9 %)
Exports of goods/services (39.7%)
Imports of goods/services (-31.9%)

source:wikiepedia
 INFLATIONARY TRENDS IN CHINA

Over the past 30 years china had

experienced 4 major periods of inflation.

1988-1989
1993-1996
2007
2008
 DIFFERENT FACTORS OF INFLATION

Mistakes made in the process of formulating and implementing

economic policy,specification,expansion of excess aggregate.

Monetary Reasons

a. Budget deficit →Borrowing money from the central bank →

Increase of monetary supply →Inflation

b. Increase in money supply by the central bank that is used to

finance the state-owned firms
 POLICIES

Suspend the price reform, mandate the state owned enterprises

and food store to increase the supply and suppress the price.
Credit plan and credit control.
1994 Budget Law (prohibits the government from borrowing from
central bank).
Control the market prices of goods items.
Increase the supply of the shortage products, through government
purchase in the foreign countries.
Relax the capital constrain
 CURRENT SCENERIO
SOURCE:BUSINESS TIMES
BEIJING: China fell into deflation at the consumer level last month
for the first time in more than six years, as ministers painted a
gloomy picture of the economy's near-term prospects.
The 1.6 per cent drop in the consumer price index (CPI) in the year
to February, which was bang in line with a Reuters survey of 26
analysts, gives the central bank ample scope to cut interest rates
further if need be to boost the economy.
Goldman Sachs said now seemed a "natural point" to lower
borrowing costs to ease the financial burden on firms, which are
battling a slump in overseas demand and in domestic construction.
Commerce Minister Chen Deming and Industry Minister Li Yizhong,
speaking at a joint news conference, both used the word "grim" to
describe the immediate outlook for Chinese exports and the
manufacturing sector.
Li said he was encouraged that power consumption had declined at a slower pace in the first two months
of the year.

But he added, "The situation of industrial production remained grim." The year-on-year drop in the CPI,
reported by the National Bureau of Statistics, was the first since December 2002.

Economists worry that, unless China's four trillion yan, or US$585 billion (US$1 = RM3.70), stimulus plan
kicks in soon, these deflationary pressures will intensify because the economy is saddled with excess
capacity at a time of depressed demand.

Consumers who expect more price declines in future may delay their purchases, weakening the
economy and undermining corporate profits.

"I think this is the first sign of deflation," Qing Wang, China economist for Morgan Stanley in Hong Kong,
said of the CPI drop.

"We expect an additional policy response, mainly to prevent deflationary expectations from getting
entrenched."

Shanghai stocks recouped early losses and ended 1.88 per cent higher as investors shrugged off the
slide into deflation and took comfort from strong lending data.

Wang expects consumer prices to decline 1 per cent in 2009.

 China: Inflation no longer an issue, but deflation could become
an issue

Inflation has declined as prices have normalised

1 2 .5 % y/ y % y/ y 1 2 .5
1 0 .0 Producer prices 1 0 .0
7 .5 Cons umer prices 7 .5
5 .0 5 .0
percent

percent
2 .5 2 .5
0 .0 0 .0
-2 .5 Cons umer prices excl. food DB forecas t -2 .5
-5 .0 -5 .0
02 03 04 05 06 07 08 09
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