Deflation

In the December 2014 quarter, the New Zealand CPI feel by 0.2 percent, mostly as the result of declining fuel prices.

Now everyone is talking about deflation, but this misses the point.

• Houses prices are up 5 percent in the last year.
• Rents have risen sharply.
• They price of farmland has been booming.
• Share prices are at record levels
• Local authority rates continue their upward drive.
• Insurance premiums continue to increase.
• All monetary aggregates from M1 to M4 are increasing.

We are a long way from deflation.

Deflation can be a problem if assets prices fall sharply, as the people who have borrowed against them have to sell them at fire sale prices. This further reduces the demand for assets, which depresses prices further. The combination of declining asset prices and high levels of debt can be a toxic combination. However, there is no sign that this is happening in New Zealand.

Yet.