Plunge In Consumer Prices Decoded

I’m sure you’ve heard a lot today about the “plunging consumer prices” in the news.  There’s a huge headline at the top of Marketwatch, Yahoo Finance, and Google News.  

The problem is that these numbers are reported linking them to the Great Depression.  This is completely different, but to the lay person, it looks like they should be scared and nervous.  No wonder there is no confidence right now.

Here’s a story from the AP, with my comments:

Inflation plunges by record 1.7 percent in November, housing starts fall more than expected

 

WASHINGTON (AP) — A record plunge in consumer prices in November puts pressure on the Federal Reserve to act decisively to guard against a debilitating bout of deflation.
BE:  What is so debilitating about this episode of deflation?  Please explain to me, AP, why this is so bad?  Is paying less for gas so horrible?  How will this adversely effect businesses?  Also, why do they report deflation in consumer prices, but inflation in core prices, which exclude food and energy?

The Fed wraps up a two-day meeting Tuesday. Economists expect the central bank to cut the federal funds rate, already at a low of 1 percent, by another half-point in an effort to keep the recession from worsening.

BE:  How about you report on how well the Fed’s easing of the monetary policy has worked so far and then talk about this “effort”?

Consumer prices, an inflation barometer, last month fell by the largest amount on records going back 61 years as energy costs posted nearly double the decline of the previous month, the Labor Department reported Tuesday.

BE:  Oh, now you tell us how the deflation you spoke of earlier is directly tied to falling energy costs.  When gas prices were skyrocketing, you told us inflation was in check because if you excluded food and energy, prices weren’t going up.  Now, you want to show how bad deflation is, and you include these items.  What kind of double standard is this?

 

Prices fell 1.7 percent, surpassing the previous record decline of 1 percent set in October. It was the largest one-month decline dating to February 1947. Core inflation, excluding food and energy, showed no increase at all in November after a 0.1 percent drop in October.

BE:  Here’s the part about core inflation, and it’s flat!  Well, that sure looks a lot like “deflation” if you ask me!  There is a huge correction going on in the commodities market right now, and that is the whole reason for the flat reading.  With the amount of money we’re printing, we should still be worried about future inflation.

The overall slide in prices reflects the big drop in energy costs in recent months. After hitting a record at $147 per barrel in mid-July, crude oil has fallen by $100 per barrel since then, pushing down the price of gasoline from a record $4.11 per gallon in July to $1.34 in the most recent Energy Department survey.

In other economic news, the Commerce Department reported that construction of new homes fell in November by 18.9 percent, the biggest drop in a quarter-century. The steep decline pushed construction down to a seasonally adjusted annual rate of 625,000 homes, the slowest pace on records dating to 1959.

Only a few months ago, some anticipated that the Fed would start raising interest rates to battle a prolonged surge in energy costs. But since September, the Fed’s focus has switched to trying to prevent the worst financial crisis since the Great Depression from pushing the country into a deeper recession.

BE:  And it has completely failed so far.  Most recessions last 10 months, and we’re a year into this one and probably haven’t hit bottom yet.  Good job, Ben, pat yourself on the back.

Energy prices fell by 17 percent in November, nearly double the 8.6 percent decline in October. Both declines were record drops.

Food costs posted a modest 0.2 percent rise in November, the smallest increase in eight months.

The 1.7 percent decline in consumer prices was larger than the 1.2 percent drop that economists had been expecting. It left inflation rising over the past 12 months by 1.1 percent, the smallest 12-month increase since June 2002. Inflation has not risen at a slower pace since a 1 percent rise in the 12 months ending in February 1965.

BE:  Again, why is this bad?  Why is it bad that the consumer can buy more goods for less money?  I love having to pay $25 to fill up my tank.  A few months ago, I was paying $40 for less than half a tank of gas.  All of our recent inflation/deflation has been energy cost driven.  

Inflation is good for the government because they can fund their ever increasing programs without raising taxes.  However, inflation is a hidden tax that erodes the value of our dollars.

New car costs fell by 0.6 percent in November, underscoring the troubles facing auto companies as demand plunges in the weak economy. General Motors, Chrysler and Ford are appealing for a government lifeline, and the Bush administration has said it is considering what type of support to provide.

BE:  Supposedly, deflation caused by people waiting for a better deal to come along is a detriment to our economy.  However, with auto sales, it’s not that people are waiting for a better deal, it’s just that they don’t want to commit to such a big ticket item when times are tough.  The lower price reflects dealers trying to clear out inventory.

Airline prices fell by 4 percent in November, reflecting the big declines in fuel prices, while clothing costs were up 0.3 percent, a rise that followed a big 1 percent drop in October.

BE:  Airline prices dropped because of lower fuel costs, which means we’re counting the same energy prices twice.  This shows how flawed the inflation/deflation calculations are.  Also, the change in clothing costs shows the month to month volitility that appears in short term measures.  We need to look at inflation over the long term to really see it’s effects.

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