Tuesday, December 16, 2008

Is deflation becoming a big problem?

I see increasing references in the media to deflation, but the simple truth is that we are a long way from true deflation. Sure, headline consumer prices declined by -1.0% in October and now -1.7% in November and that seems awfully deflationary, but we need to look to core prices to determine the underlying trend. Just as the Federal Reserve "ignored" high inflation when energy and commodities prices were soaring, we now need to "ignore" large price declines as energy and commodities prices revert back to their normal range before the commodities speculation took off a couple of years ago. In fact, ex of food and energy price changes, the inflation rate was flat in November after being down very slightly in October and year-over-year prices are up 2.0% and up 0.4% if the past three months are annualized.

In short, we are in fact seeing some welcome disinflation but are we are not yet seeing true deflation. Core consumer prices would have to come down substantially to indicate true deflation. Even if core prices decline for several months, that would not be enough to unwind much of the increase over the past three years with the commodities boom.

-- Jack Krupansky


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