Monday, February 1, 2010

Consumer Price Level Trends Still Vary Widely Across Debt Bubble Countries

Here is a quick update to the graphs from a prior post on international consumer price levels titled "Global Price Level Trends Show Varied Inflation/Deflation Across Housing Bubble Countries":
(click on chart for a larger version in a new window)

Given how much it has been in the news lately, I have added Greece to the price level graph. However, I excluded Greece from the three month trend graphs below because it is so seasonally volatile (and the European Harmonized Indexes of Consumer Prices don't seem to offer seasonally adjusted series). Nevertheless, as you can see in the absolute price level graph above, overall prices are roughly 3% higher than in July 2008 when global commodity prices peaked. This is near the high end of the countries I've included (excluding Iceland which is a dramatic outlier). A quick look at one summary of Greece's CPI suggests fuel prices for transportation and heating have been a big part of the increase in 2009, but it appears that other prices have been rising too.

Here is the three month trailing rate of change of consumer prices:

(click on chart for a larger version in a new window)

And here is the exact same chart zoomed out to show all the Iceland data:

(click on chart for a larger version in a new window)

Japan and Ireland are the only countries showing significant deflation at present.

I think my concluding thoughts from the last post are still relevant:
This was a very rough high-level look at relative price level trends and short term inflation rates over a sampling of housing bubble countries and other countries of interest (Japan, Iceland). More insights would be likely with additional analysis such as adjusting for exchange rate trends, comparing rates of government deficit spending, comparing changes in private debt levels, etc.

The price level trends across countries show some correlation at times (e.g., late 2008), suggesting global macroeconomic factors matter to some degree, but also diverge significantly at other times (e.g., the current -4% to 8% range of 3-month annualized inflation across countries), suggesting domestic country-specific dynamics are the dominant factors in price level trends, even at times of global recession/crisis.

There are at least three key domestic dynamics that could be most heavily influencing price levels. One is the degree of government stimulus relative to the contraction in private spending. A second is whether private debt bubbles have actually popped or are still growing. A third would be the relative size of these debt bubbles (total debt-to-GDP) and their recent rate of growth (since added debt contributes to annual aggregate demand).

I have not included enough data in this post to evaluate these factors for each country. But at the risk of being wrong, my current assumption is that size of government response is the number one differentiating factor, and some countries are maintaining a stronger private-sector bubble mentality than others (e.g., with respect to Australia's housing prices). If government stimulus proves politically unsustainable, or private sector debt bubbles collapse and prove to be overpowering, it could be that countries like Australia will simply lag countries like Ireland with respect to consumer price deflation. Ireland may be the country to watch — I've seen suggested that it may have begun a full scale debt deflation.

Note that different countries construct their CPI measures differently, so some trend differences likely reflect what each country considers a representative "basket" of goods and services, though the European data is all drawn from Harmonized Indexes of Consumer Prices. Also the US, UK, Ireland, Spain, Iceland, and Euro 27 price levels are not seasonally adjusted. I think Japan's and Australia's are seasonally adjusted, but am not certain.

Looking at absolute price level charts rather than just rate of change (typically year-over-year) seems especially valuable when price levels are not moving in a single direction (until the recent deflationary trends, the direction of CPI indexes was primarily up).

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