The Consumer Price Index, a key inflation reading, fell 1.7% last month, according to the Labor Department. That was much weaker than October's 1% drop and exceeded the 1.3% decline forecast by a consensus of economists surveyed by Briefing.com. Prices fell by the greatest amount since the Department of Labor began publishing seasonally adjusted changes in February 1947. Though falling prices may seem like a good thing for consumers, deflation is generally bad for the economy. If prices fall below the cost it takes to produce products, businesses will likely be forced to cut production and slash payrolls. Rising unemployment would cut demand even further, sending the economy into a vicious circle. Deflation usually represents a system-wide contraction in demand, with consumers waiting on the sidelines as they wait for prices to decline even further. Economists expect more drops in consumer prices for several months, but most say deflation is still a long way off. Deflation usually represents large, sustained drops in consumer prices, but so far the economy has only recorded two consecutive declines. "It's a bit premature to say we're in a period of deflation," said Anika Khan, economist at Wachovia. "We've had two months of record declines, [and] deflation may be a far-off worry if that continues."
Is it really premature to worry about deflation? Then why is the yield on inflation indexed government bonds for 5-year and 7-year maturities higher than the yield on their nominal counterparts?
6 comments:
There is deflation because when you bail out the banks, giving money to rich people, then the rich people get richer. End of story. Trickle down economics has never been economically valid. It was designed to create a subservient population that must kiss up to the owners of the means of production.
The high schools will teach creationism, math, and a warped flavor of history that supports rightarded stupidity concerning the Great Depression. George Bush has surpassed the wildest dreams of the conservatives.
The focus of the left is firmly fixed on higher education and pre-school where no real gains can be made. Placing economics on a firm footing of mathematics has denied any awareness of political economy to the producing people of the United States. Neoclassical economics is simply "finance" with a nice name. The truckers, plumbers, electricians, carpenters, and general sales and distribution people form the majority of the voting public and calculus is simply not on the radar. And these people work far too many hours to dig for the truth. They will believe Fox News and they will believe the teachers that teach creationism and they will believe right wing radio. And they have no clue concerning economics or government.
The Republicans and the conservatives have more money than they can ever spend and they intend to use it to make sure they all stay rich and in control forever. CNN is the latest Fox News. There will be more to come. Justice is gone; crushed under the wheels of rightarded propaganda. And that is what will keep the rich in power.
On a lighter note, the UAW is a dinosaur that needs to be buried. The UAW was taken over by the same lust for power that manifests itself in Washington. Instead of joining together with other unions and working for better health care and retirement for all, the UAW chose to set itself apart as a power broker. The UAW will now be crushed.
One of the best stimulus moves for this country is import duties, and petroleum taxes to subsidize a move to a single payer health insurance system. Good luck on that. The rich and the rightards will spend enough to defeat any such sane approach to a better economy. And the left will talk about labor unions, better student loans, and saving whales.
Do we have any reports on the core rate of inflation taking out food and energy prices, especially the latter? I would guess a substantial factor in this deflation is the sharp decline in energy prices, which should show up as a lower cost of production for many industries, and which is the reaction to a bubble we had earlier. It looks like that decline may be about over, and commodity prices in general have risen in the last few days. OPEC has announced a production cut, so I would say that it is more likely that we will be seeing oil prices going up again, at least somewhat, in the near future, or at least not going down any further. It looks like we saw a floor at $40 per barrel.
Barkley, Core CPI + forecast
I don't believe there's any question that we're in a deflationary environment but I tend to see this as related to overinvestment on one hand and policy limits on the other.
Trucker: Marginalist innovations would have been useful as a more sophisticated explanatory mechanism for the observations of classical political economy. But instead, marginalism from Jeavons on has been used as an excuse to ignore or sidestep the kinds of questions raised by the classicals. Most importantly, they subsumed the theory of distribution under exchange and eliminated the distinction between land and capital.
Marginal productivity theory is especially ludicrous, because it's essentially circular: the "marginal productivity" of a "factor" derives from whatever it adds to the price of a good, which means that any "factor" that anybody's in a position to charge for access to has a "marginal productivity" equal to whatever the "factor owner" can extort for it. Maurice Dobb gave the example of a privileged class granted permission by the state to set up tollgates across all the highways and pocket the proceeds. Their failure to obstruct the road, under marginalist orthodoxy, would become a "service" with a "marginal productivity" based on what the tolls added to the price of finished goods. John Commons called this "capitalized disserviceability."
Mainstream economics needs to recover the classical distinction between legitimate property and privilege, and the classicals' understanding of the role of privilege (i.e. artificial scarcity) in causing deviations from normal cost-price. Much of the reaction against Ricardo, that eventually led to the marginalist revolution, was explicitly a reaction against the Ricardian socialists and the questions that Ricardo had led them to ask.
Apparently core inflation in November, after energy prices, was 0.0%, according to Jim Hamilton.
Yep, as Nomura noted, flat on month over month but +2.0% year over year.
So, how about limits to fiscal/monetary policy effectiveness...think we may be hitting these or is such notion pure blasphemy?
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