To answer the question asked by the title of this article I shall use a simple, one syllable word everyone should be able to understand. NO. Did you catch that? No. No. No. No deflation. "Why would anyone worry about deflation?" - I know that is the next question. And it's a logical one, considering we all have other things to think about, i.e. braces, mortgages, car payments, employment, etc. Please allow me to mention that the topic of deflation is extremely broad and I apologize for the ramblings of the following article. I will touch on this subject in upcoming months. The reason deflation might be a cause of concern is that a). the talking heads on television talk about it, b). the cost of a "basket of goods" falls making things cost less, c). consumers can get into the mindset of 'If I wait to make this purchase next month, it'll cost less'. I'm all for lower prices but they need to come from savings made from efficiencies of production, not deflation. This kind of deflation is what we experience as Company X moves its plant to Mexico and produces widgets for Walmart to sell. When the plant was in the U.S. the widget cost $5, since the move you pay only $4. This is the good deflation. Let's look at the examples from above shall we? We can dismiss the talking heads, in general the guys on t.v. don't really know what they are saying due to the fact most are either reading what the staff writer produces, or they are out of touch with the working world where people receive a paycheck for what they actually do. As for the "basket of goods" also known as the Consumer Price Index be aware that this is a government moon-in-the-sky means of defining what it costs for the consumer (you) to purchase these products. This basket contains things like food, beverages, housing, clothes, transportation, health care, recreation, education, communications, and other services. Check out http://www.bls.gov/cpi/home.htm for the full boring details. If you want to see how the dollar has shrunk over the years when it comes to purchasing power go to http://minneapolisfed.org/research/data/us/calc/. It's amazingly sickening how little our money buys today. Now the biggest problem with this "basket of goods" concept is that energy (like gasoline and oil) and well as food are both considered volatile products - they fluctuate in price much more than does the cost of a doctor visit or a pair of blue jeans. So sometimes you will hear the Adjusted Consumer Price Index this means the person calculating the CPI has left out the more volatile items to make the news better or worse depending on what they want. Generally, what the CPI best measures is the rate of inflation as the goods in the basket increase in cost from year to year through the natural course of doing business. Whenever the production line employee gets a raise, the consumer gets to pay a few pennies more for the product. Same goes for any other production cost increase - the consumer pays more. This is called inflation. The third reason to pay attention to the talk of deflation is that if it occurs again like it did during the Great Depression of the 1930's, the country will be in a world of hurt. Demand deflation si when consumers start noticing that the cost of a washing machine - for example - is $50 less this month than last and $75 less than two months ago. Consumers are no idiots, when this trend is obvserved guess what happens? They start to think that if they wait till next month they can buy it for a savings of $100. The above scenario is a reduction in spending - consumers delay making purchases leaving producers with too many products forcing the price down as they try to unload the items at any price. A similar cause of deflation is the result of hoarding. When consumers refuse to spend their money less money is in circulation and there will be glut of goods and producers have to reduce prices in an attempt to get the buyer to part with their cash. This is doubtful to be seen again in America due to the excess of available credit, but never say never. Crisis have been known to happen and the credit lines could dry up. So we have several causes of deflation 1). Lower cost of production due to efficiencies
2). Less demand for goods,
3). Less money in circulation (hoarding). Why do I believe we are not experiencing a period of deflation, nor are we about to? Because of the other governmental statistics. The supply of available money has grown over the last 12 months by nearly 7% - so there is no hoarding. Also the CPI that "basket of goods" has increased by about 2.2% (depending on what statistician you listen to and what is included in the CPI) so if the cost is increasing, than we are talking about inflation, not deflation. |
