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Monday, September 25, 2006

Is The Deflation Alert About To Sound Again?

Using a footballing analogy, all the economic defences seem to be 'ballwatching' at the moment, and looking at the inflation issue. But the recent fall in oilprices, and the developing slowdown seems to be resurrecting a danger that many felt was long dead: deflation.

Look at this from Singapore:

Singapore's inflation rate fell to an 11-month low in August as a stronger currency made fuel and other imports less expensive.

The consumer price index rose 0.7 percent from a year earlier after gaining 1.1 percent in July, the Department of Statistics said in a statement today. That was less than the median 0.9 percent forecast in a Bloomberg News survey of 13 economists. From July, consumer prices were unchanged.

The Singapore dollar's 5 percent gain against its U.S. counterpart this year, the fifth-best performing of 15 Asia- Pacific currencies tracked by Bloomberg, is helping cut the cost of oil and other imports. That may prompt the city-state's central bank next month to extend its 2 1/2-year policy of allowing a ``gradual and modest'' appreciation in the currency.

``We are seeing less upside in fuel and utility costs,'' said Song Seng Wun, an economist at CIMB-GK Research in Singapore. ``The currency policy effectively keeps imported inflation minimal.''

and while the most recent EU data is still not out, Inflation in Germany does seem to be falling fast:

German inflation is expected to fall sharply in September as a result of declining petrol prices and base effects related to last years increase in energy prices after Hurricane Katrina, said Ken Wattret of BNP Paribas.

"Be prepared for a striking drop in inflation in September" Credit Suisse economists said.

Consumer prices data from key German states are due in the early part of the week and economists said they are likely to show a month-on-month fall of 0.2 pct in both the CPI and HICP measures. This will cut the CPI year-on-year inflation rate to 1.2 pct from 1.7 pct and the HICP rate to 1.3 pct from 1.8 pct.

Of course this is why the emphasis on 'core inflation' is so important, but still, more 'sudden drops' in German inflation will certainly not be good news.

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