Wikinvest Wire

Inflation? No, deflation... No, inflation

Friday, January 16, 2009

The Labor Department reported that consumer prices fell 0.7 percent last month but rose 0.1 percent during all of 2008. As is the custom, the monthly figures use seasonally adjusted data while the annual inflation rate gets the non-seasonally adjusted variety.
IMAGE Interestingly, as indicated in the chart above, the seasonally adjusted data now shows a 0.1 percent annual decline in prices.

And you know what that means...


No not really.

A 0.1 percent decline in the Consumer Price Index would be better characterized as follows:


The big red bold type should be reserved for real deflation as was seen in the 1930s, not the Japan style "baby-deflation" where the enlarged font really only serves one purpose - to give governments and central banks license to print money at astronomical rates to once again forestall the inevitable end of another system of pure fiat money.

They always end badly ... but, the current one still has a ways to go.

Don't confuse an energy-induced downward spike with deflation as your grandparents or great-grandparents knew it - they are entirely different things. And they will still be entirely different things in the months ahead as lower energy prices push CPI-inflation lower. Remember, this summer we'll be comparing last year's $4 gasoline to something about half the price.

You can see just how much tumbling energy prices affected overall inflation last year. Shown below are the monthly and yearly changes across all CPI categories - many prices continued to rise through 2008, notably food (up 5.8 percent), education (up 3.6 percent), and medical care (up 2.6 percent).
IMAGE And yes, amid all the talk of deflation and plunging home prices, owners' equivalent rent (the consumer price index substitution for the cost of home ownership) continued to rise, up 0.1 percent in December and 2.1 percent higher than where it began the year.

Maybe some day, some brave young economist somewhere will successfully challenge what others haven't had the gumption or common sense to object to - how owners' equivalent rent has made a laughing stock of the government's consumer price index (it accounts for nearly 25 percent of the headline inflation number) and, in the process, greatly contributed to the worst financial crisis since the Great Depression.


Anonymous said...

I always thought that year-over-year data did not need seasonal adjustment since by definition, all "seasons" are reflected in the year-over-year figure. If there is some seasonally adjusted yeaar-over-year figure that differs from the "raw" year-over-year figure, that would indicate some problem with their seasonal adjusments month by month. That is, they should zero out over a whole

donna said...

Food prices have not come down for the most part except for "special" buys. They seem to be sticky upwards. I'm learning to shop the store flyers carefully again, which I haven't done since our "broke" period when I was going back to school for my MBA when the kids were small. I wasn't working so we were deeply in debt from living on one income and paying for school. I notice a LOT of people hurting at the store, credit and cards tapped out so they are carefully counting out their small amounts of cash again when their card fails to go through. Even seeing food stamps and WIC cards here in high end Poway.

Hard times indeed. The food companies have got to bring prices down -- if I'm ending up bargain shopping, I know a lot of other people are too. I'm stocking up on the really good deals and glad I got my large freezer a couple years ago when things started to look like they would go sour. Wish I could have cashed out of the house like you did, though.... we're not at that point in our lives...

donna said...

Oh, and don't get me started on education. We get to pay out of state tuition for our older son at University of Arizona now thanks to Arnie's budget cuts at the UCs. Our son's guaranteed transfer from the community college wasn't so guaranteed after all with fewer UC slots open... At least it helps Arizona's budget!

Tim said...

I think there are always slight variations between the seasonal adjustments and the raw data when viewed on a year-over-year basis. These are two different data series and seasonal adjustments change over time based on what is actually happening in the world. To think they would always match would be to assume that seasonal adjustments are perfect, which they are not.

Anonymous said...

Actually, DEFLATION doesn't have anything to do with a decline in prices. Deflation is defined as a decrease in the supply of money and credit. A decline in prices is defined as a decline in prices, which as usual is brought about by changes in the supply and demand for goods and services. This change in supply and demand for goods and services might be brought about by Deflation, but it does not in any way, shape, or form constitute Deflation. Deflation is a decrease in the supply of the basic medium of exchange (money). Period.

And on that note, if you add up the decrease in credit brought about by banking write-downs, I think you'll find that it outweighs the new money "printed" by TARP etc. Money lost greater than money created = deflation.

- Dirtyrottenvarmint


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