Wikinvest Wire

That's it for the deflationists?

Friday, August 14, 2009

The Labor Department reported that consumer prices were unchanged from June to July, however, one year after energy prices peaked last summer, overall prices posted an annual decline of 2.1 percent (unadjusted), the biggest year-over-year drop since 1950.
IMAGE So, is that it for the deflationists? Negative 2.1 percent based on plunging energy prices?

That would appear to be the case at this point in time because, in the months ahead, the year-over-year comparisons will be made against crude oil prices that were dropping from $147 a barrel in July to around $40 in December and gasoline prices that peaked at over $4 a gallon last summer and then went on to plunge below $2 a gallon by winter.

In fact, this Christmas, energy prices may start showing some pretty hefty annual increases if current price levels are maintained, a development that is anything but certain at this point.

As shown below, the sharpest annual decline in prices since a few years after World War II ended remains a story of plunging costs for energy. In fact, with the exception of a 0.7 percent decline in housing costs (which contains household energy), transportation was the only other category to post a year-over-year decline, driven lower by a whopping 28.1 percent drop in the energy-only index.
IMAGE Since last summer, the average price change for categories with no energy contribution at all was a rather surprising +2.8 percent.

Of course, if the government's measure of housing costs included home prices instead of the nefarious owners' equivalent rent, there would be a massive decline in the housing category, but, as we've all learned painfully over the last few years, economists continue to think it best to keep home prices out of the consumer price index.

Despite home prices plunging anywhere from 10 or 15 percent to more than 25 percent in some areas over the last year, owners' equivalent rent - constituting almost one-quarter of the entire consumer price index - was unchanged from a year ago.

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Anonymous said...

The CPI does not measure inflation. It measures changes to nominal prices of a basket of goods, the content of which has changed over time and is determined by the needs of the political party in power.

Anonymous said...

Dude, you are, like, so going to get Mish pissed off with your using prices to talk about inflation.

As a long time consumer myself (pretty much my whole life), I have to say that price deflation is pretty amazing in America. Of course, I went through puberty in the 70's, so inflation is something that is natural to me.

Anonymous said...

Tim makes a very good point --- aside from the obvious problems in housing, it's all about energy prices so far and that may reverse course later this year as quickly as energy prices fell last year......

Anonymous said...

not only have home prices gone down but even ACTUAL rents have gone down a little. But unlike the cost of buying a house or the cost of a rental, I guess owners equivalent rent doesn't change.

Anonymous said...

43% that doesnt seem to change...

why not take it out and see what CPI does?

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