If rising prices don't get us, then deflation is certain to
I'm not sure if there is a collective noun for a group of economists. Given the reputation of economics as the dismal science, perhaps it should be a lamentation of economists.
But a lamentation sounds too harmonious. It fails to capture the way economists never fail to disagree with each other, even on the most trivial points. So perhaps the right term for a group of them should be a contradiction.
We've seen a good example of this tendency of economic analysts always to be at odds with each other over the last week or so. While half of them are busy warning us about the dangers of runaway price rises, the rest are worrying about - you guessed it - the threat of deflation.
Let's look at inflation first. In recent weeks analysts have been spooked by a sharp rise in the prices of basic foods.
The main factor pushing up prices higher is the severe drought affecting the Midwest of the United States, breadbasket to much of the world.
With farmers warning that the lack of rainfall will seriously damage their most important crops, prices have shot up. As the first chart shows, the prices of wheat and soya bean contracts traded on the Chicago Board of Trade have soared since the beginning of June. The price of corn, or maize as the crop is known across much of the world, has leaped by 61 per cent.
Such big increases will inevitably have a knock-on effect. Increased demand as people shift to less expensive foods is already pushing up rice prices. And with American maize used widely as animal feed, the price of fresh meat is likely to increase sharply over the coming months.
The problem isn't confined to the United States. The Russian government has just downgraded its wheat crop forecasts. Brazil's soya bean crop was damaged by a drought earlier this year. And the failure of the usual monsoon rainfall has pushed up grain prices in India over recent weeks.
As a result, the United Nations' Food and Agriculture Organisation said yesterday that its global food price index rose 6 per cent in July from June's level. Grain prices were up 17 per cent. Annualised, that equates to a 558 per cent increase.
No wonder some economists are worried. Last week economists at Spanish bank BBVA said the supply shock was flashing a 'red light for food inflation', while analysts at Bank of America warned that rising food prices threatened China with stagflation: the unholy combination of stagnant growth with rising inflation.
Not everyone shares their concern. Many economists believe the biggest danger is not rising prices but the risk of entrenched global deflation.
Policymakers fear inflation because it wipes out the value of people's savings, while rising food prices can bring angry crowds out onto the streets.
But they are just as scared of deflation, which crushes demand while increasing the real size of debts.
As a result, economists are looking nervously at China, which yesterday announced that the consumer inflation rate dropped to 1.8 per cent last month, down from 6.5 per cent a year earlier.
Even more ominous, the rate of producer price inflation slumped to minus 2.9 per cent, from 7.5 per cent 12 months before.
With China's growth rapidly losing momentum and with the economy plagued by surplus capacity following the investment binge of 2009 and 2010, economists at both Credit Suisse and independent consultancy Lombard Street Research are warning that the country is sliding into a deflationary morass.
Worse, Beijing's attempts to stimulate growth by stepping up investment will only exacerbate the problem, adding to overcapacity and increasing the chances of a debt crisis down the road.
Many analysts believe that most of the rest of the world's major economies are already there. With both Europe and the United States trying to deleverage by paying down debt, demand in developed countries is weak.
As a result, inflation is falling in both the US and the euro zone. The danger now is that further efforts to reduce debt levels will push both of them into deflation. That will add to the real magnitude of their debt burdens, trapping both economies in a downward spiral of falling prices, rising debts and deepening recession.
Of course, it could just turn out that the risk of inflation cancels out the danger of deflation.
But whatever happens, the one thing we can be sure of is that economists will continue to argue about it.