QCOSTARICA – La Republica, Costa Rica’s business newspaper, says the impact of deflation on Costa Rica would be moderate, since prices over the past year have fallen only slightly below zero.
Experts say it is difficult to predict for each case, since the cost of any product or service could increase, while interest rates could increase due to other factors, such as high demand for money, typically by the Government.
However, whatever form it takes, this is the first time since inflation began to register that Costa Rica experienced deflation, defined as a widespread and consistent reduction in prices.
The experts say we must analyze core inflation indices measured by the Central Bank, which are close to zero or even negative; and why we talk about deflation and not negative inflation.
On the other hand, up to April, the annual rate of inflation was -0.9%, according to the Consumer Price Index (Precios al Consumidor in Spanish) measured by the INEC (National Institute of Statistics and Census of Costa Rica), which began measuring in 1977.
A collapse since 2014 of prices of raw materials, largely caused by slow growth, especially in Europe and China, is one of the main causes of the phenomenon.
La Republica says what to do in a world of deflation depends on who one is.
If you are a consumer, maybe you need to wait before buying, because prices will likely be lower tomorrow. If a borrower, get a variable rate loan because interest rates tend to fall during deflation.
If an investor, storing cash in a safe place is one option. If the rates are already negative as has happened in Sweden and Japan, an option is to use a safe for cash, which in the future will worth less than today, but at least you will not be paying fees for your savings.
If you are an entrepreneur, it would be wise to think twice before increasing the payroll, and at the same time move inventory as quickly as possible. As to staff, there are always exceptions, as there are companies that grow even in a deflationary environment. In terms of inventory, cash value will diminish the longer your products stay in inventory.
CAN DEFLATION BE PREVENTED?
A note by MIT say the point is that deflation should – or so we thought – be easy to prevent: just print more money. And printing money is normally a pleasant experience for governments. In fact, the idea that governments have a hard time keeping their hands off the printing press has long been a staple of political economy; dozens of theoretical papers have argued that the temptation to engage in excessive money creation causes an inherent inflationary bias in fiat-money economies.
It is largely to combat that presumed bias that most of the world has accepted the notion that monetary policy should be conducted by an independent central bank, insulated from political influence – and has written into the charters of those central banks that they should seek price stability as their main, often only, goal.
Yet here we are, with deflation turning out to be a serious problem after all…How can this be happening?
The MIT note is in four parts.The first considers the popular view that deflation is simply a product of world excess capacity, and the problems with that view. The second part argues a point that is gradually becoming familiar: that concerns about deflation generally make sense only if they are linked with the idea of a liquidity trap, in which the money supply is irrelevant at the margin. The third part tries to go to a deeper level, relating deflationary pressures to an excess of desired saving over desired investment – an approach that leads to a seemingly paradoxical interpretation of deflationary pressures that I believe to be fundamental to the whole issue. Finally, I consider the policy implications of the apparent emergence of a serious deflationary threat.
