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Decimal Digest
02 Jan 2012

Deflation Threat for 2012?

The year 2011 was marked by global dichotomy in inflation outlook. While developed world had either low or stable inflation for most of the year, developing economies had seen rising inflation in first half of 2011, which continued to have a destabilizing effect for the rest of year.

However, with a remarkably slow or moderate growth outlook for most economies for 2012, the global economy may be staring at a synchronous threat of deflation in early to mid 2012.

The following chart vividly depicts what may happen in early 2012

The above chart shows that out of eight key commodities, six had peaked out in the first half of 2011. The continued deleveraging of the banking sector in Europe for most of 2012 alongwith the current economic expectations may mean that the commodity prices may atleast not have much upside from their current levels.

The above trend, coupled with soft labor costs in most of the developed world, should be indicative of a very soft inflation scenario for 2012, possibly indicating a threat of deflation.

This may possibly give a free hand to most of the central banks in the world to soften their respective monetary stances in early to mid 2012.

In an environment of banking sector deleveraging and fiscal austerity across most of developed world, the possibility of further monetary easing by central banks may prove to be life saving oxygen to the gasping asset markets.


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