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Inside the decline in core consumer prices
Thursday, November 20, 2008
There was quite a bit of talk about yesterday's decline of 0.1 percent in "core" inflation (consumer prices less food and energy), the first monthly decline in this series since 1982. Looking into the numbers, it doesn't seem like it's a very big deal, though the chart below is not likely to stop anyone from screaming DEFLATION if that's what they really want to do. 
The two main contributions to the overall decline come from two categories that have been declining in price for years - apparel and automobiles. There's nothing new there.
The third category with a big decline was public transportation which, as I read the BLS data, escapes the "energy" label, but probably shouldn't as a large portion of the costs of operating a public transportation system derive from the price of fuel.
All the categories that have been rising continued to rise in October, notably health care and education, and of course food prices continued their ascent, rising 0.3 percent last month, now up 6.1 percent on a year-over-year basis.
Maybe next month there will be a legitimate reason to scream DEFLATION...
1 comments:
FWIW, here's how I see it.
Inelastic goods that most of us would call 'necessities' such as food and medical care will continue to cost more since demand cannot fall much while the ever-increasing money supply keeps prices for these things high.
Elastic goods that most of us would call 'luxuries' such as most retail purchases including vacations, Starbucks coffee, a new car, granite counter tops, stainless steel appliances, etc. will be flat and even fall in price due to very weak demand since consumers have no money to spend.
To me, it's not really about inflation as in the late 1970's where all prices were up or deflation as in the 1930's where all prices were down.
The problem I see is the vast amount of "funny" money in the system with no gold standard. This vast amount of fiat currency will start out paying off bad debts but end up chasing goods that people really do NEED like food and energy.
I would also expect interest rates to begin to rise as foreigners see greater risk in buying US bonds and demand higher return.
I'm probably over-simplifying it but I can't help but feel the core of the problem we're seeing is inevitable after 37 years with nothing backing our money.
The housing bubble, thanks to Alan Greenspan, is the biggest bubble ever and we're going to see the biggest bust ever as a result.
Reversion to the mean hurts on the downside!
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