How Does the Current and Expected Deflation Affect Your Economic Decisions?

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Above presented problems are in general related to central banking and fiscal system, at least if we discuss about the scenario of good deflation. From the prospective of consumers as well as beneficiaries of various nominally fixed performances the reduction of general price level is truly positive if based on continuous real economic growth, investment increase and stable unemployment rate. Possible incorrect assumption of price increase rate may have consequences in assumption of economic growth. It is quite often that increase of quality or other features guiding to better usability of goods and services is quite often missed during prices analyze same as substitution and new markets. All the devices and machinery available today can satisfy client’s need much better as it was years ago assuming relation to the environment, variety, taste fitting etc., while in the considered basket of goods and services there is only one factor, price. So for the beneficiaries of such case belong pensioners, employees without salaries related to price decrease but also companies where the costs of raw materials for example are going down faster than the prices of as-ready products being a source of incomes. The decisions of such entities can only be affected by further expected reduction of prices. It is the most often used argument after the problem of long term tendency of price reduction. As general opinion, such an approach may cause movement and shift of decisions about consumption to the future. That could additionally cause reduction of demand and further reduction of prices, but in general it must be assumed that there is a possibility of consumption delay. Such a delay certainly cannot be related to a number of goods considered to cover basic needs. We can indicate such areas like food prices for examples. Same can be considered about basic services like barber, revamping of houses, seasonal travelling or use of roaming connections. As for the last example, even if there are new regulations from UE expected, the usage is not considered to be postponed while needed.

Coming back to the Polish situation that is existing today, according to the mentioned data published by Central Statistical Office the prices went down in November 2014 by 0,2% comparing to October 2014 and by 0,6% comparing to November 2013. The main, indicated reason was the reduction of prices for transportation and related services of ca. 2% and further minor reduction of food prices (after some more considered reduction visible in October 2014 and before). Toward higher inflation there were acting only alcoholic beverages and tobacco products and priced related to the culture and travelling for some 0,3%. Following, the experts are looking for further tendency similar to the one from October with the prices going down for another 0,2% affected mainly by further reduction of transportation prices so the annual inflation ration in December should be positioned at more or less similar level.

It is possible to follow the assumption shown above that the real and existing situation of deflation in Poland these days is related to two main aspects. One of these is a lower level of food prices that, of course, was affected by the changes in exporting situation as well as changing European conditions. The other is petrol price and transportation in general. Both groups are very important for the general basket but also both groups of products are crucial for whole economy. Food is of course the most important basic need for the society which leads to the conclusion that there will be no delay in consumption expected and no larger decrease in productivity of such goods that may affect Polish economy. As for the transportation price level, this is a base cost for industry so it may be also a way for further finding of additional profit on sold products as well as savings against potential price decrease regarding for example competitive situation.

For the reason of further analyze we should consider other aggregate economic indicators of Poland. As for the industrial production sold in November it was 0,3% higher than in November 2013. As for the actual unemployment rate, it is shown as lower than in 2013 (13,4%) reaching only 11,4% for November 2014. [7] Finally GDP expected at the end of 2014 will be 3% higher compared to previous year even if there was considered lower level related to all the conditions and sanctions undertaken in Europe[8].

For such reasons the deflation ratio visible in Poland for a few months in a percentage between 0% and -1%, in my opinion, may be considered as an influence of international situation more than domestic problem of potential recession. With regards to the presented information, there are some areas of goods and services mostly affecting cumulated and measured amount. These areas are not flexible enough to avoid them during the daily investment decisions so the real amount of money to be spent remains the same with or without consideration of existing possibility of further deflation growth caused by cumulated decisions of separate citizens. As the GDP grows to the expected level, same about the issued production and the stable unemployment, we are also expecting no problems and potential changes on the labor market that might affect further decisions on savings. As for the mentioned savings and potential credits and investments. It is not a tendency to save money on the saving accounts expecting their potential interest rated going down after further decisions of the monetary policy, although on the other hand it is no time for credit taking. Even if the nominal rates are low resulting the same central banking policy, still we can see the real interest rates going up with relation to the real value of money and reduced value of the credit based potential goods. Of course in many cases it all depends on realistic needs of the society member.

Without any special and unpredictable conditions that may occur in the changing environment, I would expect the price level returning to the natural position of low inflation. The reason of such thinking is the expected recovery of the food industry from the bad tendency which happened during the first period of 2014 and before. Then the increase of transportation and fuel prices after a long period of artificially reduced cost level of natural resources. I would also see the solution in the actual tendency of reduced PLN value comparing to the main foreign currencies which may be related to the existing deficit of foreign trade equal to 1,1 billion € as a difference between export of 136,1 billion € and import of 137,2 billion € for first 10 months of 2014.[9] In such case this balance may play a role. We will have to pay higher value in domestic currency for the imported goods while the cheaper price of exported goods