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CPI Declines Again…Deflation?

The Bureau of Labor Statistics is reporting that the CPI declined 0.1% last month. This makes for the third straight month that the CPI has declined. Is there reason to think that there is widespread deflation in the economy? I don’t think so. If you look at the CPI data the reason for the declines is that energy has declined.

Similarly to April and May, a decline in the energy index caused the seasonally adjusted all items decrease in June. The index for energy
decreased 2.9 percent in June, the same decline as in May, with a decline in the gasoline index accounting for most of the decrease. This more than offset an increase in the index for all items less food and energy, while the food index was unchanged for the second month in a row.

So, when we break it down we see that aside from energy all other goods and services went up and that increase was more than offset by a decline in energy prices. In fact, this might be a good thing. If higher energy prices over all is contractionary, then lower prices are expansionary. Granted if prices are so low that the energy industry is suffering that is not a good thing, but it is possible for prices to decline and the energy industry to still be profitable and if the losses are more than offset by the rest of economy then it is actually good economic news. Sort of like how the stock market interprets a slight rise in unemployment or prices as good news.

If we look at the index of Personal Consumption Expenditures we see the same story. Looking at the entire index we see that there was a brief period of declines in the index in the 4th quarter of 2008 and first quarter of 2009 and since then the percent change in the index has been positive. If we exclude food and energy there isn’t even any quarter in the last 2 years that show a decline.

Overall, claims that we are in a deflationary period should be taken with some caution in light of this data. Perhaps there was cause for concern several months ago, and it maybe reasonable to keep an eye out for deflation how, but that is about it.

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About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research.

Comments

  1. Brummagem Joe says:

    Now we know Krugman wouldn’t agree with you, but John Makin at AEI? I’ve been a bit of a sceptic myself but we’re starting to see a body of evidence building (the numbers are much the same across Europe) that starts to give Krugman’s insistent claims some credibility. At least to this non economist they do. I also know there is a lot of excess capacity in the US and European economies that will keep prices under downward pressure for the foreseeable future. So it may well be much more serious than you’re suggesting.

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  2. john personna says:

    I’d be interested in feedback on my gut-feel that the Fed has accepted (mild?) deflation as a less bad outcome. Or at least (somewhat brief) deflation.

    They are still talking an inflation game, so I’m saying this might be a “lying is optimum” thing.

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  3. Brummagem Joe says:

    sorry forgot to add link to Makin piece.

    http://www.aei.org/outlook/100971

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  4. john personna says:

    BTW, the Consumer Metrics Institute has been showing contraction since about January, and the the slower metrics from the gov, etc., continue to track their data … with a delay:

    http://www.consumerindexes.com/

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  5. john personna says:

    For those who didn’t see it, the original piece:

    “Austerity is stupid, stimulus is dangerous, lying is optimal, economic choices are not scalar”

    http://www.interfluidity.com/v2/862.html

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  6. Brummagem Joe says:

    “I’d be interested in feedback on my gut-feel that the Fed has accepted (mild?) deflation as a less bad outcome.”

    Less bad outcome to what? I’d imagine Bernanke has bad dreams about being the Fed chairman who tip toed into a deflationary spiral.

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  7. john personna says:

    Less bad than overstimulating inflation? Less bad than a failed bond offering?

    It just seems from the zeitgeist that nothing’s happening. If deflation were Bernanke’s worst nightmare, he’d be doing more now. Maybe he’s just very patient ….

    In related news Alan Greenspan has re-appeared to say “let the Bush tax cuts expire”:

    http://www.bloomberg.com/news/2010-07-16/greenspan-says-congress-should-let-bush-era-tax-cuts-expire-transcript-.html

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  8. Brummagem Joe says:

    “Less bad than overstimulating inflation? Less bad than a failed bond offering?”

    Demand for long and short T bills is strong and there isn’t the remotest chance of an over stimulating inflation and even if there was it’s very easy to choke off. Bernanke’s stimulatory tools are not considerable and at the moment the signs are mixed anyway. However, I’m sure he isn’t remotely interested in presiding over deflation of any other sort. And I saw the Greenspan comment, he’s got religion a bit late in the day but I’m standing by for the Republican denunciations.

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  9. john personna says:

    There was another interesting news item, some guy’s graph of total mortgage debt and total housing value … ah, here it is:

    http://jessescrossroadscafe.blogspot.com/2010/07/speaking-of-unresolved-bad-debt-in.html

    Maybe combine “Bernanke’s stimulatory tools are not considerable” and that overhang, and we have an explanation for the current situation, which I see as at least tacit acceptance of short term or mild deflation.

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  10. Steve Verdon says:

    Krugman has been going on about deflation for a very long time. Makin’s argument isn’t that we are in a deflationary period, but that inflation levels are very, very low. Again, there might be some reason to worry about entering a deflationary spiral, but we aren’t there yet, and it is questionable that we are heading that way.

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  11. PD Shaw says:

    On the general topic of deflation, I found this article interesting:

    Will We Have Inflation, Deflation, or Hyperinflation?
    http://dailycapitalist.com/2010/06/29/will-we-have-inflation-deflation-or-hyperinflation-download/

    To summarize the specific deflation points:

    Inflation or deflation is a monetary phenomenon. An increase in money supply causes
    inflation. A decrease in money supply produces deflation. (Ceteris paribus.)

    The deflationists’ analogy to Japan’s experience from 1989 to 2003 is only partially
    applicable. The American tradition is to allow banks and businesses to fail.

    This cleansing process is ongoing but is slow because the government has given banks
    incentives to delay the process.

    The deflationists have yet to show that deflation has occurred as they say. While asset
    values are declining, mainly real estate assets, money supply has not crossed the
    deflation Rubicon yet.

    The deflationists seem to conflate the concepts of deflation and deleveraging, which
    aren’t the same things.

    A double-dip recession will put political pressure on the government to take any steps
    they can to thwart the decline.

    The Administration and Congress will put pressure on the Fed to counteract the
    decline. All politicians and most Keynesians and even Monetarists believe that price
    inflation is preferable to price deflation.

    h/t drew

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  12. PD Shaw says:

    Sorry for the poor formatting.

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  13. john personna says:

    I like the fact that you said this:

    The deflationists’ analogy to Japan’s experience from 1989 to 2003 is only partially applicable. The American tradition is to allow banks and businesses to fail.

    Rather than:

    The deflationists’ analogy to Japan’s experience from 1989 to 2003 is only partially applicable. The American solution is to allow banks and businesses to fail.

    Unfortunately, the difference between “tradition” and what we are actually doing right now matters.

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  14. Brummagem Joe says:

    Steve Verdon says:
    Friday, July 16, 2010 at 13:53
    “Makin’s argument isn’t that we are in a deflationary period, but that inflation levels are very, very low. ”

    No one, not even Krugman, has said we’re actually yet in a deflationary period. Krugman has been warning of the danger of slipping into one for two years at least while Makin who is diametrically opposed to him politically now appears to be joining him him in saying it’s a distinct possibility. This is not without significance, even if you dismiss it.

    “which I see as at least tacit acceptance of short term or mild deflation.”

    What connection is there between abysmal housing debt/equity ratios and Bernanke’s lack of tools to stimulate demand that make you believe he has any desire whatsoever to preside over deflation which is a central bankers nightmare?

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  15. john personna says:

    What connection is there between abysmal housing debt/equity ratios and Bernanke’s lack of tools to stimulate demand that make you believe he has any desire whatsoever to preside over deflation which is a central bankers nightmare?

    The fact that the abysmal housing debt/equity ratios imply impacted consumer spending.

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  16. john personna says:

    sorry for my poor formatting. the “unfortunately” should have been top-level

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  17. Brummagem Joe says:

    “The fact that the abysmal housing debt/equity ratios imply impacted consumer spending.”

    Well of course they have, it’s a large part of the reason why consumer spending has slowed, but this doesn’t indicate that Bernanke is willing to practise a regime of benign neglect while deflation occurs on his watch. There’s no way he’s going to let the deflation genii out of the bottle if he can avoid it because it’s infinitely more difficult to fix than inflation.

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  18. PD Shaw says:

    john personna, those were quotes pulled out of the linked piece (thus the poor formatting). The author is more concerned about local and regional banks, that still have bad CRE debt and are at the center of the credit crunch. The government is closing these banks down, but he argues that they are doing it to slowly: “the problem is that the process is being slowed down by government policies that prevent bankruptcies (mark-to-make believe, extend and pretend, delay and pray, and TARP, TALF, and housing subsidies).”

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  19. john personna says:

    I don’t disagree strongly with you Joe, on these issues. But neither have I really been nudged out of my gray area. I’m not in opposition to your view, just not wholly accepting.

    Bernanke is not, say, demanding that any of those “use them fast” debit stimulus cards be mailed out. He seems to be letting this “soft spot” work its way out.

    PD:

    “the problem is that the process is being slowed down by government policies that prevent bankruptcies (mark-to-make believe, extend and pretend, delay and pray, and TARP, TALF, and housing subsidies).”

    Yes, I agree.

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  20. Brummagem Joe says:

    “He seems to be letting this “soft spot” work its way out.”

    That’s because we are not yet in a deflationary period and the data is mixed (as Verdon points out). Krugman is attacking him for inaction but inaction in the face of uncertain data is a far cry from saying he wouldn’t move swiftly should things deteriorate. I’ve personally gone from being fairly sceptical to believing we are entering a period where it is a distinct possibility. Bernanke’s ability to fix the problem is limited because he’s in a liquidity trap. This means that he’s going to have to come up with some ingenious ideas(which he’s been quite good at doing) and/or the administration might have to chip in with Stimulus II.

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  21. Steve Verdon says:

    Demand for long and short T bills is strong and there isn’t the remotest chance of an over stimulating inflation and even if there was it’s very easy to choke off.

    This does not sit too well with your claim of liquidity trap.

    “There is the possibility, for the reasons discussed above, that, after the rate of interest has fallen to a certain level, liquidity-preference may become virtually absolute in the sense that almost everyone prefers cash to holding a debt which yields so low a rate of interest. In this event the monetary authority would have lost effective control over the rate of interest. But whilst this limiting case might become practically important in future, I know of no example of it hitherto (my italics).” John Maynard Keynes, The General Theory of Employment, Interest, and Money 1936

    I don’t think the problem is liquidity, but that smaller businesses can’t seem to get loans.

    Big companies are building up cash and are expected to report strong earnings starting this week. Not so for small businesses that can’t get loans – or hire freely until they do.

    The gap helps explain why the economic rebound isn’t stronger and could even stall. Federal Reserve Chairman Ben Bernanke stepped up pressure Monday on banks to break the logjam and lend more to smaller firms, which employ at least half of American workers.

    And also here,

    Though we believe that our and others’ efforts are making a difference, we also know more must be done, and that additional effective action requires hearing firsthand from knowledgeable people who can speak from diverse perspectives about the challenges facing small businesses. The insights we obtained from small business owners, lenders, and others in this series of meetings have given us a more nuanced understanding of the problem and will help us identify areas where we might be able to do more. Not surprisingly, these meetings confirmed that facilitating small business financing is not a simple or straightforward matter. Notably, the term “small business” encompasses a heterogeneous mix of enterprises, ranging from pizzerias to start-up technology firms, and each small business faces a unique combination of local economic conditions and complex relationships with customers, suppliers, and creditors. Hence we should be wary of one-size-fits-all solutions.

    So why aren’t banks lending? Because they are sitting on the money because they have too many bad loans?

    I don’t think it is a demand side issue, but more of a supply side issue. It still renders the Fed’s ability to influence the economy to near zero, but it isn’t that there is a liquidity trap.

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  22. Brummagem Joe says:

    “This does not sit too well with your claim of liquidity trap.”

    You don’t think the Fed is in a liquidity trap which I was taught (a long time ago admittedly) was a situation where monetary policy can’t be used to stimulate an economy through lowering interest rates or increasing the money supply? To my non economist eye, I’d have said Bernanke’s situation exhibits exactly these characteristics. Or is my definition incorrect?

    I’m not going to argue with Keynes since I’m basically a Keynesian, but the reason why demand for T bills (which it seems to me as a practical matter are indistinguishable from cash) is high and yields consequently low is angst and the consequent flight to quality. Yields of around 2% for short dated bills or 3 and 4% for long dated ones seems preferable to negligible money market returns when there’s relatively little exposure to risk in the US govt bond market.

    As to the availability of loans for small businesses I’m out of the loop these days but based on a conversation with the manager of my local small bank a few weeks ago he claimed there wasn’t a problem, and indeed they were eager to lend, although I’ve no doubt standards have been considerably tightened from three years ago. This is a chicken and egg argument. If demand were stronger, business P and L’s would be more robust and it would be easier for them to access capital. There are plenty of signs of big companies experiencing such profitability recoveries maybe it’s taking some time to trickle down to their sub contractors. At bottom we need more demand in the economy imho.

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  23. john personna says:

    You can declare, Joe, but I can read elsewhere:

    The general disinflationary trend continues – CPI is unchanged over the last 8 months – and with all the slack in the system (especially the 9.5% unemployment rate), CPI will probably stay low or even fall further.

    I don’t buy anyone’s analysis 100%, but CR is one of the people who have been right before:

    http://www.calculatedriskblog.com/2010/07/consumer-price-index-declines-01-in.html

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  24. Brummagem Joe says:

    john personna says:

    ” You can declare, Joe, but I can read elsewhere:”

    So CR agrees with me (not to mention Krugman and Makin) that there’s at least cause for concern. He’s also echoing my point about underutilized capacity in the system which acts as a price and wage depressant. The economy needs more demand, it’s how you create it that is the problem given that you have a Fed with restricted options and one political party intent on blocking solutions to the problem.

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  25. Brummagem Joe says:

    john personna says:

    ” You can declare, Joe, but I can read elsewhere:”

    And in case you mean something else, core inflation at 0.9% is not yet deflation, it’s still inflation parrticularly since the number is somewhat higher with energy and food rolled in, although it’s an indicator of a cause for concern which I think valid but Verdon does not.

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  26. john personna says:

    Joe,

    If you can read “The general disinflationary trend continues” as consistent with your “That’s because we are not yet in a deflationary period and the data is mixed (as Verdon points out).”

    Then there’s not much I can say.

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  27. Brummagem Joe says:

    john personna says:
    Saturday, July 17, 2010 at 13:22

    “Then there’s not much I can say.”

    +0.9% core inflation is not DEFLATION, yet. I wonder at your comprehension level since everything I’ve written has disagreed with Verdon’s basic premise that deflation is not a threat. It’s definitely a danger, but were not there yet. If you can’t understand that there’s not much I can say.

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  28. john personna says:

    You demand way too much agreement Joe. I was generous for a comments section when I wrote:

    I don’t disagree strongly with you Joe, on these issues. But neither have I really been nudged out of my gray area. I’m not in opposition to your view, just not wholly accepting.

    Now you are just being a dick, wanting to make sure I interpret CR’s “disinflationary trend” as “not DEFLATION.” With caps, yet.

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  29. Brummagem Joe says:

    john personna says:
    Saturday, July 17, 2010 at 14:04
    “You demand way too much agreement Joe…….Now you are just being a dick, ”

    I don’t demand anything other than accuracy and civility.

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  30. john personna says:

    Accuracy? About future expectation? Seriously?

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  31. valwayne says:

    Obama and the Democrats have done everything wrong. Their massive corrupt spending on their special interests e has plunged us deep into debt without spurring the economy or job creation. Their arrogant radical left wing agenda has left everybody confursed, but convinced that massive costs and taxes are going to hit all of us until our eyes bleed. Only a fool would invest or hire in the mess Obama and the Democrats have created. We are on the edge of a 2nd deep dip unless we get massive political change soon!!!!

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  32. Brummagem Joe says:

    valwayne says:
    Sunday, July 18, 2010 at 23:38
    “Only a fool would invest or hire in the mess Obama and the Democrats have created.”

    Er let me get this straight. Obama took office in the middle of the sixth consecutive quarter of GDP decline and we’ve now had four quarters of GDP growth and are almost certainly experiencing growth this quarter. Would you like to to explain how Obama and the Democrats “created” this mess. Your reply will be very educational.

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  33. Nick says:

    Seriously folks, you can debate monetary trends until you’re blue in the face, but demand (corporate and individual) and the ensuing recovery is being stifled because of one word, uncertainty. No one knows what the ruling party is going to do next and no matter what issue they tackle, the majority of Americans have no confidence that they’ll get it right. Set your alarm for November, save as much money as you can and stay out of the markets until then. In fact, I’d stay out of the markets until after the lame duck session just to be safe. I’m not rooting for Republicans, I’m rooting for anyone who repudiates the current direction we are headed in and acknowledges that unchecked government spending and interference (Fannie & Freddie) is what got us here.

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