Tuesday, November 25, 2008

Deflation: Should you Worry?

If you have tuned into the news during the last few days, you must have heard the coverage on deflation, and how spiraling deflation is getting out of control. But if the prices are really falling, it never felt like that at the grocery store, or at the departmental store, or toy store, or at the dentist. So why are the analysts worried sick? I believe they are trying to find news where none exists -- as yet.

While deflation may be a definite economic evil, the numbers so far do not add up to the extremes pointed out by the mainstream media or the analysts. But then, you could not blame them really -- an inflation report within normal limits won't make the news, would it?

Let us go to the source, and look at some numbers provided by the Bureau of Labor Statistics.

Here is the graph for Consumer Price Index - All Urban Consumers, Not Seasonally Adjusted, available at http://data.bls.gov/PDQ/servlet/SurveyOutputServlet?data_tool=latest_numbers&series_id=CUUR0000SA0&output_view=pct_1mth.

CPI, All Urban Consumers, Not Seasonally Adjusted, for ALL ITEMS

The graph above shows data for ALL ITEMS. And that is a key difference because when you exclude the prices of food and energy, the prices actually rose as seen the picture below. This is available at http://data.bls.gov/PDQ/servlet/SurveyOutputServlet?data_tool=latest_numbers&series_id=CUUR0000SA0L1E&output_view=pct_1mth. Now we have all seen the prices at the gas pump fall dramatically after their equally dramatic and unexplained rise in summer this year, and that is a big part of the deflationary data being touted as a real concern.

CPI, All Urban Consumers, Not Seasonally Adjusted, for Excluding Food and Gas

Again, if the prices are really falling, why are we not feeling any reprieve? Because year over year inflation is UP, by 3.7% even when you include the recent big drops in gas prices, (http://data.bls.gov/PDQ/servlet/SurveyOutputServlet?data_tool=latest_numbers&series_id=CUUR0000SA0&output_view=pct_12mths). See below.

CPI - All Urban Consumers, 12 Months Percent Change for ALL ITEMS

Here is a break-up of inflation numbers, and these are really helpful in understanding where the problem lies, rather than painting a broad-brush picture of impending doom due to deflation. All numbers are available at: http://www.bls.gov/news.release/cpi.t07.htm. The numbers below are for based on chained Consumer Price Index for All Urban Consumers (C-CPI-U): U.S. city average, by expenditure category and commodity and service group, with December 1999=100.

Expenditure categoryUnadjusted Relative Unadjusted percent change to importance, indexes Oct. 2008 from-Oct, 2007Unadjusted Relative Unadjusted percent change to importance, indexes Oct. 2008 from-Sept, 2008
All Items



Food & Beverages









Transportation (read: Cars and autos)



Medical Care






Education & Communication



Other goods and services



Energy (read: Gas)



There you see the two categories that are causing the biggest deflationary pressures, cost of energy (we know gas is down), and cost of transportation (cars and autos). Neither of them is exactly news, sales of big ticket items is down, and is expected to be slower with the continuing credit crunch.

Should you worry? Decide for yourselves!

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