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.