Consumer Prices Fall For The First Time Since 1955
Grab your nearest economist and hold them tight, prices are falling. The Labor Department says that the obsessed-over Consumer Price Index fell 0.4 percent for the year — the first annual drop since 1955.
Ideally, economists say that 2% inflation is consistent with a healthy economy and high employment. A decrease in prices sounds like a wonderful idea, but it can have disastrous consequences. (Click here for yesterday's explanation of why deflation isn't awesome.)
The WSJ points out that inflation was as high as 5% this August, before the price of energy and other commodities dropped.
In a sign of just how rapidly price risks have changed, annual inflation was above 5% as recently as last August, before energy and commodity price drops kicked in and the global economic downturn deepened, bringing prices down for many imported goods.
"I don't think the concern about deflation in the nearer term is one that can be entirely discounted," White House economic adviser Lawrence Summers said last week
The WSJ also noted that wages stayed about the same. An increase in hourly wage rates was offset by a decrease in the amount of hours worked.
Consumer Prices Dipped in March [WSJ]
(Photo:dsb nola)
Post a comment
Comments:
Core CPI, which excludes food & energy was up.
I'd wager that a deflationary spiral is not a concern with food an energy -- it's not like you are going to put off eating or going to work.
@j-o-h-n: Lagging indicator, and not all that surprising.
Out of control inflation is more likely the biggest danger we have with the creation of all this new money.
Sure, deflation is not a good thing. But I'd definitely like to see some prices come down in the industries tied to the energy spike last year. Food, Agriculture, Home Heating and Electricity, etc. We have a new ethanol plant starting up here soon, it may turn out to be a casualty of this.
I have to say that the image for this post is kind of awesome.
Inflation = bad news; deflation = bad news. You can't win, but the news media can always find bad news.
@Watergun: But the price of oil was market manipulation. It had nothing to do with inflation or deflation. Everything above 60 dollars a barrel was due to manipulation.
@globalman: If it's corn based ethanol, it probably won't survive. Ethanol made from corn is not cheap.
Deflation IS NOT necessarily a bad thing. Prices come down on lots of things due to improvements in production, increases in efficiency, etc.
Additionally, the government published CPI is not a useful indicator of our economy -- they leave too much out of the formula.
I've been harping on this to my friends for months now - if you look at the average worker wage over the last decade or so, it's been pretty flat. Yet consumer spending has kept going up. We've been using cheap credit to live _way_ beyond our means for a long time now, so this is actually more of a _correction_ - even though it falls under the definition of 'deflation'.
Thank god prices are finally coming down!!!
@Corporate_guy: Or useful, ultimately. I get that it's good to have an employer, but I'd just as soon the damn thing never opened.
@t-r0y: It's good for a short time as long as it plateaus. I'm more worried about good ol' stagflation biting us in the ass down the road once the deflation bottoms out.
@ojzitro: Yup. Which is what everyone's keeping an eye out for, so they can fix it lickity-split with a bump of the Fed Rate.
Hyper-inflation's only a concern historically when a country's Central Bank is asleep at the wheel. Not so much the case here and now.
So long as interest rates don't sky rocket I'm happy with this news
@t-r0y: Err, no. It's very hard to get out of a deflationary spiral and they're prone to panicking crowds. And they're awful for economies. Bad, bad, very bad. Worse than low-double-digits inflation, even (which is bad).
@floraposte, Trai_Dep: yeah, corn-derived ethanol is just one big sham. moving to it on a large scale wouldn't solve problems, it would create more.
What's strange is gas is cheaper, product prices are going down, yet all my bills continue to go up. My electricity went up 20% last year because they said their costs are rising. My property tax went up about another 5% despite falling home prices. My cable went up despite no new channels. My Netflix went up, and credit card companies are all trying to raise their rates. Food has gone up. So just about every aspect of life has gone up in price, yet most people got no wage increases, or even had to take pay cuts. Ever heard "blood from a turnip"?
well....around here in NJ...price of electricity went UP 18 percent. AND the energy asisstance programs, their applications pending approval went from 2100 to 13000 since August 08
Could have fooled me that prices are down..
Does anyone know what happened in 1955 that caused the CPI to drop? I thought 1955 is considered to be the quintessential golden year.
I have a few items "saved for later" in my Amazon.com shopping cart, and when I checked in there a few days ago, almost all of them had dropped in price--some substantially.
And, I'm immediately suspicious of anyone who says deflation is bad.
@razremytuxbuddy: Mine did, too. And then 3 days later they went back up. I've noticed price swings on Amazon of 10-15% up and down on a regular basis... don't wait too long.
If you don't think deflation is a bad thing, research the Great Depression. People put off big purchases in anticipation of the price falling. That slows the economy, which then discourages buying further because people continue to anticipate falling prices... and so on. If you are in retirement and don't want to have an income, I'm sure it is great. If you want to keep your job, it is not.
@Saboth: Ever heard "blood from a turnip"?
And the not getting thereof, although in my family they tend to say "from a stone."
I, too, am tiring of spending $60 on $50's worth of groceries. Yes, if we were in the market for more big-ticket electronics we could probably get a hell of a deal, but the quality of clothing has decreased to keep pace with the same prices (a $15 T-shirt from Old Navy in 2009 is read-through, but a $15 T-shirt from Old Navy in 2005 or 2006, like the ones in my closet I thought I was replacing, are real fabric), a 20-oz bottle of Coke should in no way be the $1.49 that stores charge (it's why I have about two a year now), and they want HOW MUCH for asparagus?
In the grand scheme of things, minor and day-to-day fluctuations are meaningless, but I'm paying the same as or more now for daily life than I was a year ago, and a year ago I lived in one of the highest cost-of-living places in the country and the world (Manhattan). A huge deflationary trend would, indeed, be bad but I'm all for some short-term price adjustments.
So we had high inflation (5%), then oil crashed, now we have marginal deflation? Why is everyone getting so weird about it?
I saw gas go from over $4 a gallon to under $1.50 a gallon in just a few weeks. Yeah, averaged in, that's going to look pretty bad, but it was just a bubble burst.
Now I'm no economist, but let's say I pay $10 to go see a movie. Then in the next year or so, the theaters artificially raise it to $30 a ticket. Everyone stops going to movies and the price comes crashing back down to $10. Oh noes, going from $30 to $10 is some serious deflation! But if they hadn't been greedy in the first place, it would look flat and we'd have nothing to complain about.
@Trai_Dep: I can't speak for everyone, but due to having not as much money as I used to, my wife and I have really limited the number of times we drive, going out less frequently and doing more at once.
Energy costs can be finicky.
In Pittsburgh we've been notified that the price of natural gas is down significantly from previous years. It's great news for homeowners.
@laserjobs: Seriously. God forbid that prices ever decrease! This attitude that because its a new year, prices should increase is crap. Nothing changes, except a date established by humans, which has no bearing on anything related to the production and sale of a product.
Just look at movie tickets, they routinely raise prices year by year, now its $10+ for a movie ticket, yet I receive the same goods as I have for my entire life- a seat in the theater.
@RonDiaz: I'm not seeing it either. Aside from gasoline, everything else has gone up and is still going up. Even a friggin Super Soaker at Dollar General that was $8 last year is now $12.
That's true, but each dollar buys you X in goods and services. In a deflation, your debts (and everyone else's) are being repaid in more expensive dollars. A deflation is also reason for companies to reduce wages to conform to the indices.
@t-r0y: For the effects of full-fledged deflation, or a couple nominal dips here and there? For the latter, we're in agreement, not a big deal.
@Saboth:
Your property taxes going up are a result of deflation. The city needs x number of dollars and with your home values going down they need to raise the rates to make up from the lost income. The food coming on line now have been produced with $4 a gallon gas. I don't know where you live but a lot of areas are mandating green alternatives for power and they are driving the costs up. Also the power company might have lost big on the futures trading and bought the contracts when they were at all time highs.
@dragonfire81: True, but it's unlikely that a LOWER cost of gas make you drive less.
That's the worry of the deflationary spiral, it'll be cheaper later, so:
lower price -> less use -> lower price -> less use -> ...
I love deflation. I have no real assets except for cash savings and my buying power is getting better. I do worry about a large deflationary spiral because that will spell doom for our economy for years to come.
@bnelson333: It's bad if everyone assumes that the cut to $10 is only a pause on the way to something yet cheaper later and they still stay away.
@t-r0y:
[globaleconomicanalysis.blogspot.com]
This website spells it out clearly that we are in deflation and in some ways pretty screwed. I think this is what Trai_Dep is hinting at.
@Barrister76: That will never happen. The government loves to print money, and your dollar's value decreases every day.
@TEW: I assume Saboth means that s/he is paying 5% more. Rarely will a city actually decrease its budget, and usually that will be because of a decrease in money from the state.
With deflation, why would you buy anything today unless it is absolutely necessary when you know it will cheaper tomorrow? With inflation the opposite is true.
@TEW: And my I suggest the following...
1) The The Blessings of Deflation
2) The Imaginary Evils of Deflation
Wow ! Thats great. maybe pricing will start falling in line with wages and earning powers instead of the 12% annual increase expected on the bottom line every year. Pricing over that last 5 years have never been in line with actual cost of materials. They were driven by corporate growth, expectations, monopolys, and greed. I can't mention my former employer but I have seen a lot of GM's fired because they didn't meet that 12% annual goal. Even when they outsourced.
Ohhhh....and we were denied cost of living pay increases for 8 consecutive years. So I watched my budget shrink while the cost of everything continued to increase.
this isn't too surprising considering how much the price of oil has dropped.