Inflation as a Proxy for Recession

The idea that low inflation is a proxy for recession may be an old one. That does not mean it is not a true one. If so, the global economic slowdown has picked up speed.

Inflation has been remarkably low in the U.S. for some time. The Federal Reserve has signaled on more than one occasion that a rise in prices is no longer an immediate concern.

The National Bureau of Statistics in China released numbers showing that  inflation dropped to 4.1% year over year in December. That may mean the government will ease its monetary policy. In turn, it is an indication that official fear of inflation has abated.

India’s economy remains fairly hot. GDP expansion has continued at a pace not for off  China’s. But, India released numbers that show food costs fell 2.8% in the last week in December. The government said that food costs are still on an increase, but the recent data are positive notwithstanding

Germany released its own data on inflation from the Federal Statistics Office. It was 2.3% in December, down from 2.8% the month before.

Inflation was a major concern less than a year ago. Part of that had to do with a sharp worldwide rise in food prices. That increase as stopped for the most part. But food is only part of the picture. Demand for manufactured goods and the raw materials used to create them has moderated as well.

Obviously, the drop in inflation cuts two ways. Consumers and companies that spend a little less or only slightly more on the same amounts of goods and services are more likely to consume. That assumes that business activity and real wages do not undermine demand even when prices are low. And this could be a problem. Real wages in the U.S. have lagged price increases, even if those increases are modest. A marriage of contracting wages and a contraction of inflation would be mostly bad news.

It is a sign that inflation rates in several of the world’s largest economies, and among several of the largest nations by population, have fallen. The global recovery is usually combined with the threat of rapid price increases. That threat has nearly disappeared.

Douglas A. McIntyre