More Evidence of Declining Inflation

Among the data released today were the Consumer Price Indexes in December for a number of countries--Spain and Italy in Europe and Indonesia, Thailand and Taiwan in Asia. The year to year percentage changes in the indexes show that inflation has come down dramatically in all but Indonesia since mid year. And even in Indonesia, which has experienced relatively high inflation, partly as a result of the natural disasters that have plagued the nation since the devastating tsunami of 2004, inflation has fallen in each month since September. The first chart show inflation in Spain and Italy and the second, inflation in Thailand, Taiwan and Indonesia.

Much of the decline in inflation is due to the decline in the price of oil. Brent crude was $144 a barrel on July 11 and $35 on December 30. But increasingly it has been the performance of the economy that is exerting downward pressure on prices. Residential construction is way down, consumer demand is falling as is business investment. Fear of deflation is beginning to replace fear of inflation. Inflation in Thailand, for example, was less than 0.5% in the month of December, down from 9.2% in July. Less dramatic but still significant is the decline in inflation in Spain from 5.3% in July to 1.5% in December.