Oliver's Insights

Deflation - What is it and what would it mean for investors?

Earlier this year inflation was a big worry. Now, with inflation fading rapidly around the world, there is more and more talk of deflation. This note looks at the key issues surrounding deflation: What is it? Why could it be a problem? What is driving it? What does it mean for investors? How likely is sustained deflation?

The key points are as follows:

• Global inflation is falling rapidly due to falling oil prices and the economic slump. Next year inflation may turn into deflation, i.e. generalised price falls.
• Sustained and uncontrolled deflation would be bad news as it would accentuate problems associated with high debt levels and falling asset prices.
• However, the US Federal Reserve seems to be well aware of the risks and has indicated it will do everything possible to head off a deflationary spiral. It is already embarking on quantitative easing (or 'printing money').
• One outworking though is that government bond yields are likely to fall even lower (possibly towards the record lows seen in the 1940s).

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View Oliver's Insights 18-Dec-2008 (PDF: 280KB)

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