What, me worry about deflation?

OK, so we should worry about deflation.  Deflation is economically destabilizing and particularly destructive in a recession, as it raises the real burden of debt and the real interest rate, as well as inducing consumers to postpone purchases in the hope of future price decreases.  And in the current slowdown there’s already been considerable deflation here and abroad of housing, asset, and commodity prices.  But  . . .

The news that U.S. consumer prices just had their largest one-month drop in at least 61 years (the records only go back to 1947) does not look like a big deal to me.  Ditto the previous month’s near-identical news about a then-record drop in U.S. consumer prices in Oct. 2008.  The media seem to be trumpeting it as the latest sign of the apocalypse, but all of that 1.7% drop in the consumer price index (CPI) was due to a big drop in energy prices, and as a child of the 1970s I’m still inclined to think of any energy-price drop as a good thing, whatever the cause.  The “core” CPI (which excludes food and energy prices) was unchanged, and the CPI for food prices rose by 0.2%.

(The story was about the same in Oct. 2008:  the overall CPI fell by 1%, the food CPI rose by 0.3%, and the core CPI fell by only 0.1%.  Although the news reports noted that this was the first drop in the core CPI since the devastating recession of 1982, 0.1% is hardly a decline at all.  Considering the band of error that inevitably surrounds these figures, and considering the slight rise in food prices (the other excluded category from the core CPI) , I think it would be a lot more informative to say that Oct. 2008 was a month of falling energy prices and price stability otherwise.)

  • Also, Fed Chairman Bernanke is strongly anti-deflation, as this 2002 speech makes clear. The Fed’s current response to the crisis, whatever its defects, seem to reflect that stance.
  • Side note:  Experts are saying that the falling energy prices are directly due to the recession.  It does appear that the demand for gasoline (and by extension, the amount of driving we do) is a lot more cyclically sensitive than I ever would have guessed.  Especially considering how the demand for gas seems to be very price inelastic in the short run.  Maybe we simply cut back on a range of expenditures (travel, shopping, downtown entertainment) that entail driving, causing the demand for gas to drop?

(modified only slightly from a post on my old blog circa mid-Nov. 2008 )

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