How close to deflation are we? Perhaps just a little closer than you thought

[RedEarth]

July 09, 2010
How close to deflation are we? Perhaps just a little closer than you thought
Since last October, the consumer price index (CPI) has gone up an annualized 0.7 percent. On an ex-food and energy basis, the number is a little lower, at 0.5 percent. And the Cleveland Fed's trimmed-mean and median CPIs, at 0.7 percent and 0.2 percent, respectively, also put the recent trend in consumer prices in pretty low territory.

And this is before we take into account any potential mismeasurement, or "bias," in the construction of the CPI.


How big is the CPI's bias? Well, in 1996, the Social Security Administration commissioned a study on the accuracy of the CPI as a measure of the cost of living. This so-called "Boskin Commission Report" said the CPI was overstated by about 1.1 percentage points per year. The commission identified several sources of potential bias, but about half of the 1.1 percentage points resulted from new products and quality changes that were slow or otherwise imperfectly introduced into the price statistic.

Since that time, the Bureau of Labor Statistics has initiated a number of methodological changes that have reduced the CPI's mismeasurement. In a 2001 paper, Federal Reserve Board economists David Lebow and Jeremy Rudd put the CPI bias at only about 0.6 percentage points. And again, of this amount, the big share of the bias (about 0.4 percentage points) resulted from the imperfect accounting of new and improved goods.


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[FormerDittoHead]

1. Which way to panic? Last week the "fiat currency" was going to result in Germany-style INflation..

WTF?

Last week I was told about the dangers of a "fiat currency" and the inflation that results:
http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=389x8692987

I was scolded, LAUGHED AT because 'housing prices keep going up'(?):
http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=389x8692987#8694934
conspirator: "With the fucking printers running 24/7, the prices of houses keep going up and the buying power down."

This was not the only "fiat currency / gold standard" message posted last week, either.

SO NOW the danger is DEFLATION?

Can you sky-is-falling gurus pick a lane?

If you think the problem is DEMAND, as I do, when the "gold standard" guys post messages about the price of oranges in a row boat (look at the video linked to in the OP cited above for this ridiculous analogy) don't leave me out to dry to set things straight.

[Sherman A1]

2. Then why are all my utilities busy asking for rate increases?

Electric, Gas, Water, Sewer District are all before our state public service commission begging for more and more money.

My costs haven't gone down.

[bemildred]

3. To fend off rate cuts"?

Or worse yet "declining revenue"?

[Hawkowl]

5. Conservation

Utilities are interesting because conservation, or using less energy actually can cause your rates to rise. How? Lets say a utility builds a power plant for $1000 and expect to pay for it by charging 1000 customers a $1. Now lets say that the customers conserve energy and use only $0.50 worth of electricity. Now the utility needs to raise its rates to cover the power plant and the decreased electricity usage.

So there is, in a sense, a deflation in the actual amount of electricity used, which then perversely leads to a per unit rate increase.

[benchwarmer]

4. I cry Bull

If anything I think inflation, particularly in cosumer goods (most consumeables) have been steadily and stealthly increasing year after year. This is evidenced, and I make no apologies for the lack of science on this, by my grocery bill. My grocery bill has been steadily growing, while the things in my cart at the end of a shopping trip has been decreasing. I buy less and spend more money. There is no deflation here.

On the global perspective, I cannot comment. However, given that rampant deflation due to poor policy making and not enough government investment deepend the great depression, I have some concern that gun-shy Euopeans and election-year deficit scare-tactic politics here in the U.S. may have deflation come again.

[Sherman A1]

6. Agreed & Well Said

I will tell you that there are fewer weekly advances than we saw in 2007 & 8, but they are still very much there and products are being "right - sized" on a continuing basis. A couple of ounces here an ounce there. The 20# bag of Charcoal is now 18#'s and alike along with a higher regular retail, so that it can be put on special more often.

The best advice I can offer is shop the ad, plan your meals around the ad, use as many coupons as possible, get friendly with the meat clerk or manager to find out what time of day (probably early AM) they mark down items in the wrapped case
and game "their" system to your best advantage.

[Bgno64]

8. Disagree

Look at housing prices - they are dropping like a rock. Been watching prices for more than a year now in our neck of the woods, I've seen some houses dropped 20, even 30 percent in price - and still no buyers.

Given the falling value of what for many people is their single biggest asset, and the unemployment picture, people are simply and understandibly spending less - with more goods chasing fewer buyers.

[fasttense]

7. I heard Ravi Batra on the Thom Hartmann Show say to expect inflation in

groceries and other commodities but deflation in most manufactured items and services. He said that he believed commodities would be the next bubble and the financial wizards would be playing around with commodities much as they played around with mortgages and loans. So, the final price of those commodities (wheat into bread, soybeans into cooking oil) would be higher.

Yet he said hyperinflation was not likely because we are the world's reserve currency and if the dollar was devalued too much it would devalue most of the world's reserves and their economies. Besides, the financial wizards have to have something to park their wealth into.

He said that cash is king. If you have a job keep it, don't go looking for an education now. Pay what you have to on your mortgage but don't pay any more than necessary and save as much money as you can.

I'm paraphrasing and am not an economist but this is what I took away from his interview about 2 months ago.

[mwooldri]

9. Deflation has been real in the UK...

My United Kingdom student loans are tied with the UK's equivalent of the Consumer Price Index. It went down into the negatives, so I started seeing interest CREDITS to my student loans, because I had a negative interest charge rate.

What kills me though is the currency fluctuation between the Dollar and Sterling. Over the last five years the US Dollar has ranged from $1.30 to £1.00 to $2.10 to £1.00. My earnings remain relatively constant in US dollars (it goes up about 3-5% a year), but with the fluctuating exchange rate market my wages in UK terms would range anywhere between £19,800 and £32,000. That is about a £12,000 difference or at today's exchange rates a $19,000 difference. What this means is that one month a student loan repayment could cost me $180, the next month it could be $220... it means that the closer the £ gets to be parity with the $, the cheaper things in the UK are to me, and the other way around, going "back home" gets to be expensive.