MONETARY POLICIES


FX Chart 1 – Global median inflation


persistence of inf lation since the end of WWII is either a feature of the modern economy or an historical outlier. We’ll go with it being a feature of the modern economy,


and one that devalues the wealth of households slowly but persistently over time.


It’s incredibly difficult to measure


inflation as every household is a bit different, and experiences a different rate of annual price increases. Furthermore, deflation in some sectors is desirable as it is a sign that productivity and competition are healthy and consumers will be better off as prices decline (who doesn’t want a cheaper TV or car?).


Chart 2 shows the cumulative inflation for selected goods and services between 1996 and 2016. In a modern economy dominated by services, it is notable that the largest price increases have been seen in these


sectors. Also, we


would point out that the forces of globalisation and technical advancement have supressed prices for many manufactured goods and in some cases, even lowered prices – examples of good deflation.


There is also a process known as hedonic


adjustment measuring “gimmicks”


(and other that we


won’t go into) that attempts to measure and adjust for a product’s improvements so that even if the price for a car or TV remains static over time, with the technical and quality improvements seen, the price used to calculate the rate of inflation actually falls. We are pretty sure that the vast majority of consumers have no idea what hedonic


adjustment is; all they Chart 2 – Inflation of various goods & services 1996 to 2016


know is how much income they have and how much they need to


FX TRADER MAGAZINE October - December 2017 39


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