Deflation occurs when there is a decrease in the general price level of goods and services in the economy. Over the past 30 years, there have been significant deflationary forces at work: China, technology and monetary policy.
China – gave businesses access to cheap labour and subsidised capital from China (and other emerging markets). This put downward pressure on consumer prices. Furthermore, to protect its exports China built huge foreign exchange reserves to suppress the value of its currency and ensure global competitiveness.
Technology – this has boosted labour productivity, disrupted traditional businesses, increased price transparency and opened-up supply chains, reducing the cost for consumers. Firms now focus on growth over profits – think Amazon.
Monetary policy – each market crisis has been ‘cured’ by lower interest rates and, since 2009, quantitative easing. Policymakers’ intentions were to stimulate the economy to aid the recovery, however decades of loose monetary policy has failed to deliver sustainable economic growth. The question looms large – has monetary policy run out of road?