Consumer Prices in U.S. Decline 1%, Most on Record(bloomberg.com)
bloomberg.com
Consumer Prices in U.S. Decline 1%, Most on Record
http://www.bloomberg.com/apps/news?pid=20601068&sid=aEUKE5CH6LeU&refer=home
13 comments
Not something that's good for the consumer!
no doubt some reversion to the mean is beneficial...but a healthy economy shows some nonzero manageable inflation level...like around 2-3%. a deflating economy is deadly in the longer run, because demand goes away and so does employment.
no doubt some reversion to the mean is beneficial...but a healthy economy shows some nonzero manageable inflation level...like around 2-3%. a deflating economy is deadly in the longer run, because demand goes away and so does employment.
>.but a healthy economy shows some nonzero manageable inflation level.
Not actually. Permanent inflation is a feature of modern fiat money regimes. As I noted, we have experienced prolong periods of modest deflation and economic growth in the past.
Economic growth tends to increase prices for all the usual Keynesian reasons and tends to increase the money supply, even with a commodity reserve currency. However, increased productivity tends to reduce prices. If productivity increases fast enough and money growth is limited by a commodity standard, it is possible to have a growing economy with declining prices. In fact, it has happened in the past, as I noted.
Not actually. Permanent inflation is a feature of modern fiat money regimes. As I noted, we have experienced prolong periods of modest deflation and economic growth in the past.
Economic growth tends to increase prices for all the usual Keynesian reasons and tends to increase the money supply, even with a commodity reserve currency. However, increased productivity tends to reduce prices. If productivity increases fast enough and money growth is limited by a commodity standard, it is possible to have a growing economy with declining prices. In fact, it has happened in the past, as I noted.
"Reversion to the mean" is the important observation here. Everyone seems to have forgotten that prices have been skyrocketing for the last two or three years.
As recently as six months ago, everyone was freaking out over the possibility of runaway inflation, and the government was cooking the official statistics by excluding such "non-essentials" as food and energy. This is one of those times where moderate deflation is probably a healthy correction, and I hope the government doesn't try to stop it.
As recently as six months ago, everyone was freaking out over the possibility of runaway inflation, and the government was cooking the official statistics by excluding such "non-essentials" as food and energy. This is one of those times where moderate deflation is probably a healthy correction, and I hope the government doesn't try to stop it.
It's very difficult to have "moderate" deflation, though - it tends to be all or nothing, either no deflation or a deflationary spiral. This is because once prices start dropping, people have an incentive to hold onto their cash, since if they do nothing it'll gain in value. This results in even less economic activity, less demand, and more deflation. And so on, until the misery level gets so high that people have to spend or starve.
Exactly. I have no debt and a bit of cash savings that are now worth 1% more, woo hoo!
Sustained high deflation is only good for you if you have a magical source of guaranteed income, completely and totally independent of the economy, like a magic money printing machine.
Sustained high deflation is only good for you if you have a magical source of guaranteed income, completely and totally independent of the economy, like a magic money printing machine.
Wages tend to be sticky. That is, they adjust slower than many other prices. This works against workers in an inflationary environment and for them in a deflationary environment. Keynesian monetary stimulus is premised on the "sticky wage" theory, basically the idea that by printing money you can reduce workers' real wages in the short run and increase the output of firms.
Of course the flip side is that if workers' real wages increase too much in a deflationary environment, this could lead to high unemployment in the short term.
Of course the flip side is that if workers' real wages increase too much in a deflationary environment, this could lead to high unemployment in the short term.
Wages are sticky but jobs aren't.
Hyperinflation kills banks, because the loans devalue so fast they are worth nothing when they are repaid.
Deflation in small amounts can be good for savers, but high and sustained deflation kills all borrowers.
That includes short term financing businesses need to pay salaries while sales are still being made and profits are still coming in.
Overall it leads to everyone hoarding cash and not spending and that just murders the economy.
Hyperinflation kills banks, because the loans devalue so fast they are worth nothing when they are repaid.
Deflation in small amounts can be good for savers, but high and sustained deflation kills all borrowers.
That includes short term financing businesses need to pay salaries while sales are still being made and profits are still coming in.
Overall it leads to everyone hoarding cash and not spending and that just murders the economy.
Sharp deflation, like during the Great Depression, is bad as you say. Slow deflation, like the period after resumption, is not bad.
In reality, the economy is quite capable of coping with any mild change in prices, and quite bad at dealing with sharp changes in price. It doesn't particularly matter whether those changes are up or down.
In reality, the economy is quite capable of coping with any mild change in prices, and quite bad at dealing with sharp changes in price. It doesn't particularly matter whether those changes are up or down.
Like an annuity or pension... retirees come out ahead for once.
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Just goes to show how much we were getting shafted by OPEC.
Reddit isn't going to like this ... no sir
For the record, in the post-Civil War error we experienced mild deflation and strong economic growth. As long as prices don't make sudden, double-digit jumps, the economy can cope with it. And it's NICE to see consumer prices going down for a change.