The government wants us to think that inflation is a potential problem, but it's not
May 15, 2009
– Comments (6)
I just came across the following article on the April CPI numbers that were published today in this morning's Wall Street Journal: Prices Suggest Little Deflation Risk . I think that this headline is very misleading and is drawing incorrect conclusions from the data.
Despite what the title says, my interpretation of the recently published CPI data leads me to believe that if not deflation then dis-inflation is very much here right now. The April CPI was flat after falling 0.1% in March. Over the past year, consumer prices have fallen at the fastest price in nearly 50 years (June 1955).
The author cites the fact that the fact that most of the drop in prices came from a decline in the price of energy and food as a reason that deflation remains "remote." First, this conclusion is incorrect. While the often cited but fairly irrevalant "core" CPI which excludes food and energy (I'd like to meet the person who doesn't actually have to pay for these things in real life) did increase 0.3% (actually 0.253% which was rounded up) in April, a whopping 40% of that increase was a result of a dramatic (9.3%) increase in the price of tobacco products in response to the government raising taxes on companies in the industry. This increase was artificially created by the government and it is not sustainable. The core CPI ex-tobacco, only rose 0.16% in April and 0.06% in March.
Another questionable part of the core number is the fact that according to the government, housing...which accounts for a whopping 40% of the CPI...only fell 0.1% in April. Really? I'd love to see the data that this number is based upon. In fact, the "owners' equivalent rent" portion of the CPI actually rose 0.1% for the month. These numbers seem completely off the wall to me. Ask any person in America is the price of housing is increasing or decreasing. I'm pretty sure that they'd say that it is falling fairly rapidly.
To me dis-inflation is very much here right now. Yes, the Fed and Treasury are pumping money into the system fast and furiously. However, the destruction of the shadow banking system, the reduction in leverage, and many other factors have caused the velocity of money to drop dramatically. The drop in velocity has been greater than the increase in money supply.
The government wants us to believe that inflation is a major potential problem because they don't want everyone to get sucked into a terrible deflationary vortex where everyone believes that prices are falling so they wait to buy stuff, which causes prices to actually fall, and so on, and so on. But it's not.
To me, the only way that we see a real inflation problem in the United States any time soon is if the world begins to choke on all of the paper the government is printing to fuel its massive spending and budget deficit. A dramatic drop in the value of the U.S. dollar, which is currently sitting near its lowest level of the year, would obviously cause the prices of everything to rise for Americans. This may eventually happen, I just think that it is several years away. Perhaps that conclusion is incorrect.
There are many people out there who believe that inflation is a very real, very immediate problem that I am sure will disagree with this post. I welcome you to post your thoughts on this subject and try to change my mind. I am trying to keep an open mind and see all of the angles here. Let's just try to keep things civil :). Remember it's Friday. I'm looking forward to a cold beer and some poker after I put the kids to bed.
Deej
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