Vanishing Inflation and the Decline in Commodity Prices

More countries are reporting declining rates of inflation. Recently published inflation rates in the four largest countries of Europe--Germany, France, Italy and the United Kingdom--continue to trend downward, as can be seen in the first chart. In November, the inflation rate in Germany was 1.43%, down 1.85 percentage points from its peak of 3.28% in June. The rate in France was 1.63%, down 1.98 percentage points from its peak of 3.61% in July. And in Italy, the rate was 2.70%, down 1.38 percentage points from its peak of 4.08% in July.

Although the rate in the U.K. in November was still high at 4.07%, it was 1.18 percentage points below its recent peak of 5.25% in September. Moreover, Mervyn King, Governor of the Bank of England, in a letter to the Chancellor of the Exchequer (The governor is required to write an explanation to the Chancellor of the Exchequer whenever the inflation rate exceeds 3%) expressed his view that the rate of inflation in the U. K. could fall below 1% in the next year.

The world wide economic slowdown is responsible for much of the decline in inflation and, in turn, of the much deeper decline in commodity prices. When demand changes significantly, basic commodity prices tend to rise or fall to a much greater degree. The volatility of the changes in the prices of oil, lead and wheat as typical of commodity prices are shown in the second chart. The prices of all three commodities are currently about 50% below prices of a year ago.