Saturday, January 10, 2009

Flywheel - Economy - Inflation vs Deflation

This information was forwarded to me by Laurie Baird of Okanagan

Canadians not deflated about economic outlook

Jacqueline Thorpe, Financial Post Deflation may be public enemy number one among central bankers, monetary policy wonks and bond market aficionados, but a survey shows it has not even a blip on the average Canadian's radar screen.

The poll released Wednesday shows 50% of Canadians expect inflation to increase over the next year, versus 21% who expect the current recession to be deflationary.

The finding, contained in Pollara Inc.'s annual financial outlook survey, underscores the grip inflation continues to hold on the Canadian psyche. It could ultimately be a good thing, providing a bulwark against deflation -- a downward spiral in prices caused by consumers delaying purchases in anticipation of cheaper goods in the future. Deflation can become debilitating if it causes companies to cut production and employment, leading to ever-weaker output.

That inflation, rather than deflation, is still the main concern for Canadians could be understandable if the survey were conducted last summer when commodity prices were soaring and gasoline roared across $1 a litre, but the poll of 2,670 people was conducted between Dec. 11 and 15, 2008. That was after gas prices had tumbled, sale signs filled shopping malls, stock markets had tanked, house prices were beginning to fall and constant talk of depression and deflation filled the airwaves.

After decades of worrying about inflation, it could be that Canadians have not yet wrapped their heads around the idea that prices can also materially drop.

It could also be that with the domestic economy in relatively better shape than in the United States, Canadians simply do not see deflation posing as much of a threat as south of the border. There, the U.S. Federal Reserve has pulled out all the stops to try to prevent deflation, including cutting interest rates to nearly zero.

Meanwhile, it is hard for any average consumer to see lower prices as a threat.

"Nobody understands deflation can be bad for them because they don't recognize it could also involve their pay cheque," said Avery Shenfeld, senior economist at CIBC World Markets.

Mr. Shenfeld was among a panel economists who attended the release of the survey at an Economic Club of Toronto outlook on Wednesday.

"The reason prices are falling is usually that the economy is in a mess."

The Bank of Canada could take some heart in the perception that deflation is not considered as big a threat as policymakers or the media do. For deflation to become dangerous it has to seep into the consciousness, causing consumers to curtail purchases.

"Inflation expectations tend to be pretty sticky in both directions which is actually good thing for public policy," Mr. Shenfeld said.

While deflation is no big threat, the survey, with a margin of error of plus or minus two percentage points 19 times out of 20, shows Canadians see many economic demons over the next year: A record high 91% believe the economy is in recession; almost a third believe the recession will last 13 to 18 months; 68% believe employment will worsen while 31% believe either it somewhat likely or very likely someone in their household may lose a job.

Oddly, many Canadians still expect their personal financial situation to be maintained or even improved in 2009, said Michael Marzolini, chairman of Pollara. This could be because the Canadian unemployment rate has not dramatically soared yet.

Canadians are all government interventionists now, survey data show.

"The villains are on Wall Street or in Washington," Mr. Marzolini said of the average perception. "The current solution is direct government intervention, spending on infrastructure job retraining, tax cuts and even bailouts and protectionism.

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