demand side deflation
The policy tools available to central banks are aimed at altering the demand side of the economic equation and so all they can do is sit back and watch supply side impacts play out. Falling prices create circumstances for prices to continue falling.This is considered a ‘benign period of deflation because we get lower prices – but output is also rising. From a very basic standpoint, there are two main potential causes of deflation:Deflation usually occurs during a deep recession, when there is a sustained fall in demand and output. It is a recession where demand falls significantly, and eventually, firms start to cut prices in a desperate attempt to boost spending. Sellers meet such an increase with more supply. The most famous "supply side shock" in the modern era was the 1973-74 "Oil Shock." Monetarists emphasize the role of the money supply – falling money supply and/or falling velocity of circulation causing a fall in the price level.In rare circumstances, rapid growth in technology may enable lower prices, whilst at the same time increasing output. Demand-side economics refer to Keynesian economists' belief that demand for goods and services drive economic activity. AD could fall due to : Fiscal austerity. Economic theory predicts a sharp rise in prices from such events. Is this a sign that disinflation/deflation risk is heating up? This could be termed ‘benign deflation’ as output increases. But, the overvalued exchange rate also made UK exporters uncompetitive. Since 1960, savings as a percentage of disposable personal income has ranged from roughly 3-15%, holding within a 5-10% range since 2010.It's extraordinary that inflation has remained tame in an era of aggressively dovish monetary policy - a policy that's been in force since 2008!In the current scenario, the conflicting forces pushing for higher and lower inflation still look set to favor the latter.It's no small thing when a massive, supply-side shock wreaks havoc across the global economy. When and if that change arrives it'll be obvious in market and economic data. Consider the history of the velocity of the money supply (a measure of the rate that money is exchanged), based on M2 money stock. In the IS–LM model (investment and saving equilibrium – liquidity preference and money supply equilibrium model), deflation is caused by a shift in the supply and demand curve for goods and services. All else equal, if supply drops, prices are expected to rise. The The counterargument is that in contrast with the 2008-2009 financial crisis, prices aren't widely collapsing. One major cause of the US deflation was a fall in the money supply following the failure of many banks in the aftermath of the Wall St crash and the Great Depression.The UK experienced a period of temporary deflation during 2009 (if we use the RPI method, which includes interest payments). Demand-pull inflation is the upward pressure on prices that follows a shortage in supply. Will A Demand-Side Shockwave Keep Inflation Muted?
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