According to this story in the WSJ, the CPI fell a bit last month. This is the scenario most dreaded by Bernake's Fed, in fact he has promised if necessary to throw $100 bills from helicopters to prevent same - earning him the nickname "Helicopter Ben" in some quarters.
His concern is widely shared in the business community:
"This is scary stuff," said Mike Schenk, an economist for Credit Union National Association. "We are teetering on the brink of a massive downward spiral. Deflation is a threat."
We do know that it (deflation) was the hallmark of the great depression and we have accepted steady inflation over the years to keep it at bay.
That kind of massive deflation may already be inevitable as an aftereffect of the collapse of markets worldwide. Tens of trillions of dollars in paper wealth have simply vanished in the last months.
A look at some of the numbers below the fold, and, I fear, more questions than answers.
The huge and dramatic run up in crude oil prices that helped fuel the commodities bubble has crashed and, in fact represents a large part of the overall decline:
Energy prices declined by a seasonally adjusted 17%, the most since February 1957. Gasoline prices plunged by 29.5% in November, the most since the government began keeping records in February 1967. Fuel oil prices dropped by 7.2%. Commodities prices declined by 4.1% in November.
I'm not really sure that is such a bad thing - especially since surging gasoline prices are what pushed a lot of everyday folks off the proverbial economic cliff. This is especially true in light of some more of the numbers:
Medical, food, clothing costs rise
Prices for certain goods rose in November, even as the overall number fell. Medical care prices, for example, climbed by 0.2%. They are up 2.7% in the past year. Also, food prices rose by 0.2% in November.
The cost of owning a house, meanwhile, rose 0.3% in November.
Falling transportation prices contributed to the overall decline. Those prices dropped 9.8% in November, the most in 61 years. They are down 8.9% over the past year.
So - as usual - the virtually unavoidable costs paid by the poorest among us are still rising.
Inflation has been called "the cruelest tax." It eats into purchasing power of any any who are not fortunate enough to get an annual increase in their wages. The minimum wage is reduced to a pittance over time, along with other wages. The bottom of the wage scale has a greater impact on upper level wages than most imagine; this year, we saw the first real decline in consumer purchasing power in my lifetime - after a long period of virtual stagnation.
For those with savings, it's a double-whammy. First, you have to put your money into riskier investments, just to break even. A 5% return on savings with 5% inflation is actually a money-losing proposition as you have to pay taxes on that 5%!
For wage earners, it's an annual salary cut as rising prices make an adequate income less so.
Over the next few months food prices should begin to come down as transportation and oil-related production costs declines are hopefully passed on to consumers. It's about time. Hopefully, a sane universal health care policy will bring down medical costs. Is that a bad thing?
Technology costs have steeply declined from day one; it's built into the model. Hasn't exactly caused the collapse of the flat screen, computer and software markets.
We have had enormous productivity gains in this country for over a decade now. Profits and prices have increased, along with executive salaries - but wages have stagnated. Wouldn't a bit of deflation help there?
We associate deflation with the crash of '29 and the great depression. Maybe it's inevitable that if it occurs, it will feed on itself and throw 25% out of work, like before. If so, I'm "agin" it. Some have also thought for some time that any inflation inevitably leads to runaway inflation; that has turned out not to be the case.
I think the country could stand a bit of deflation, myself. Food, housing, energy and transportation prices are still too high - the basics of modern life. Many economists now say that housing construction won't resume until prices fall considerably more. If it begins to spiral out of control, I'll turn on a dime. Actually, I think we are going to find out, one way or another. I don't believe that there is much the Fed can do to prevent that. In fact, we will be very fortunate if we don't have a massive deflation - almost immediately followed by runaway inflation as the effects of the massive looting of the Treasury being conducted right now hits home in the form of demands for all that bad paper the Fed is guaranteeing - and they have to run the printing press 24/7 to meet them, causing the collapse of the dollar.
Hope I brightened up your day! ; )
Thank whatever deity or deities you prefer, that the grownups are taking over soon.