Although the lower fuel prices might look like good news at first sight, and it's definitely great news for the industries that are heavily dependent on oil and gas, in the larger picture it poses a thread of deflation and stagnation. The markets are already nervous, and in wait for the even lower prices, customers are postponing the bigger purchases. Investment plans are getting delayed, and this brings lower demand as a whole. Which in turn brings lower prices, and thus comes the danger of stagnation. Japan, the world's third largest economy, is a fine example in that respect.
Energy usually isn't a trigger of deflation, which is why those who measure such things usually produce an inflation index that excludes energy and food. After all, you will certainly put off buying a house and maybe a car if you know they'll be cheaper in a year, you won't put off filling up your tank or buying food for dinner.
This isn't about postponing the filling of your tank. The connection between fuel prices and virtually all aspects of the economy is systematic, not incidental, and often indirect, and rather counter-intuitive - from food industries to heavy industry, to utility services, even to real estate, virtually all industries are affected in one way or another. Falling fuel prices impact the macroeconomic situation in a very tangible way:
"...For producers, cheaper prices mean either less profits or even losses, which leads to a slower national economic expansion. In other words, right now oil supplies are outstripping demand and causing commodity prices to fall. At the point in time they would dip below the point to where producers could profit, they most likely stop digging - and stop hiring, or even start firing. That’s economics 101. But, in keeping with the scholastic parallels here, the economic and political curves won’t immediately intersect." (source)
And,
"While there are clear cost savings for American drivers, the situation is
( ... )
Really? Then all these guys must be wrong and you must be right:
"The most immediate impact of the fall in oil prices is to increase real incomes of everyone in Europe. However, the lower oil prices have also exacerbated the potential danger that Europe could experience deflation, which would inhibit economic activity by encouraging people to postpone spending, and it would also increase the real burden of debt." (source)
"Lower energy prices should stick around, boosting growth and risky assets like stocks but increasing the risks of deflation. ... On balance, lower oil prices are a boon, though a boon with small-probability but perhaps high-impact risks." (source)
"Investors are worried about deflation, too, as evidenced in this week's volatile financial markets, as the Dow Jones Industrial Average tumbled as much as 239 points Tuesday after dropping 350 points in afternoon trading Monday. ... For most consumers, it doesn’t make intuitive sense that economists should fret sliding
( ... )
Of course, lower oil prices are bad for oil producers, as many articles in your first response supports. Yes, you can of course find a lot of links, that's because those who write for business and investment journals want to talk about deflation.
Here's a paper from the ECB, the folks who are actually responsible for keeping inflation in check while avoiding deflation rather than just writing about it. Their stuff is of course a lot harder to find, but I'd put far more faith in what they're saying. They use historical examples and such. It's only five pages and has pictures, I'd recommend it.
There are also a lot of articles which really take Mario Draghi's comments out of context. When someone asked him earlier this year if he saw that deflation was more of a risk this year than last, he agreed it was but that the risk was still minor. The first part of his response is what made the headlines. Vitor Constancio made a fairly clear statement about what would trigger deflation in the EU. The Fed is even less concerned about
( ... )
Yes, you can of course find a lot of links, that's because those who write for business and investment journals want to talk about deflation.
Well, the topic here is deflation, no?
Yes, they certainly affect prices across the board
Thank you.
However, the drop in oil prices don't create an expectation of future oil prices in the same way that drops in wages or asset prices do
No one has argued here that oil prices affect expectations MORE than wages or asset prices. And we're not talking about asset prices, we're talking about oil prices. That's distraction. I smell fallacy here.
They use historical examples and such. It's only five pages and has pictures, I'd recommend it.
Right. Your patronizing has been duly noted. Is there any other wisdom you'd like to generously deign upon me?
Reply
Reply
"...For producers, cheaper prices mean either less profits or even losses, which leads to a slower national economic expansion. In other words, right now oil supplies are outstripping demand and causing commodity prices to fall. At the point in time they would dip below the point to where producers could profit, they most likely stop digging - and stop hiring, or even start firing. That’s economics 101. But, in keeping with the scholastic parallels here, the economic and political curves won’t immediately intersect." (source)
And,
"While there are clear cost savings for American drivers, the situation is ( ... )
Reply
Really? Then all these guys must be wrong and you must be right:
"The most immediate impact of the fall in oil prices is to increase real incomes of everyone in Europe. However, the lower oil prices have also exacerbated the potential danger that Europe could experience deflation, which would inhibit economic activity by encouraging people to postpone spending, and it would also increase the real burden of debt." (source)
"Lower energy prices should stick around, boosting growth and risky assets like stocks but increasing the risks of deflation. ... On balance, lower oil prices are a boon, though a boon with small-probability but perhaps high-impact risks." (source)
"Investors are worried about deflation, too, as evidenced in this week's volatile financial markets, as the Dow Jones Industrial Average tumbled as much as 239 points Tuesday after dropping 350 points in afternoon trading Monday. ... For most consumers, it doesn’t make intuitive sense that economists should fret sliding ( ... )
Reply
Here's a paper from the ECB, the folks who are actually responsible for keeping inflation in check while avoiding deflation rather than just writing about it. Their stuff is of course a lot harder to find, but I'd put far more faith in what they're saying. They use historical examples and such. It's only five pages and has pictures, I'd recommend it.
There are also a lot of articles which really take Mario Draghi's comments out of context. When someone asked him earlier this year if he saw that deflation was more of a risk this year than last, he agreed it was but that the risk was still minor. The first part of his response is what made the headlines. Vitor Constancio made a fairly clear statement about what would trigger deflation in the EU. The Fed is even less concerned about ( ... )
Reply
Well, the topic here is deflation, no?
Yes, they certainly affect prices across the board
Thank you.
However, the drop in oil prices don't create an expectation of future oil prices in the same way that drops in wages or asset prices do
No one has argued here that oil prices affect expectations MORE than wages or asset prices. And we're not talking about asset prices, we're talking about oil prices. That's distraction. I smell fallacy here.
They use historical examples and such. It's only five pages and has pictures, I'd recommend it.
Right. Your patronizing has been duly noted. Is there any other wisdom you'd like to generously deign upon me?
Reply
Reply
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