19 Feb 2010

Are Consumer Prices Collapsing?!

All Posts 10 Comments

If you just read the headlines, you would be under the impression that we were once again tottering on the brink of a deflationary cliff. Darn that Fed for raising the discount rate! CNBC says for example: “Core Consumer Prices Show First Drop in 28 Years”

(The actual text of the article was fairly neutral, I should concede.)

Here’s the actual situation: The raw CPI level rose 0.3% from December 2009 to January 2010. If that one-month change were to occur 11 more times, the CPI would rise a total of 4.2% for the year. Not Weimar Germany, but hardly a lack of “price pressures.”

Now all this talk about “the first fall in core CPI since December 1982” is referring to this fact: If you first seasonally adjust the data (which suppresses price hikes because prices typically rise in the first quarter of the year), and then strip out energy and food prices, then that (largely meaningless) number fell from December 2009 to January 2010.

For what it’s worth, the raw CPI rose 2.6% from January 2009 to January 2010. Obviously my warnings about runaway price inflation have yet to come to fruition, but the deflationist camp is hardly sitting pretty either.

And remember, we have been conditioned to think that 2009 was a period of dancing with deflation, when even the official price index has been rising at a decent clip. With this mindset, the Fed won’t “have” to take aggressive action to drain away excess reserves until the genie is not only out of the bottle, but has built a condo and renewed his driver’s license.

10 Responses to “Are Consumer Prices Collapsing?!”

  1. David says:

    Bob, I'm not sure I agree with your math. Taking 1.003^12 gives me 3.67% annualized inflation. Still a decent pace, though.

  2. Anonymous says:

    y/y can be deceiving – i like to look to at m/m annualized rates as well.

    Also to put things in perspective you can show people a chart of the actual price level…and for all those that scream about deflation show them a 2008-2010 chart of the price level vs. a 1929-1933 chart

  3. Anonymous says:

    Bob, it looks like you took 1.03^12 instead of 1.003.

  4. John says:

    Bob, Thank you for giving us the real info underlying the often inappropriate headlines we get from mainstream press. I very much appreciate it. John

  5. Bob Murphy says:

    Are you guys using the actual numbers from the link I gave? It wasn't 1.003 on the dot, there were trailing digits. If I raise the exact number to the twelfth power, I get (rounded) 4.2% growth.

  6. Anonymous says:

    Is the slow-mo crash being pulled off?

  7. Jim D. says:

    "Bob, Thank you for giving us the real info underlying the often inappropriate headlines we get from mainstream press. I very much appreciate it. John"

    Worth repeating.

  8. von Pepe says:

    Dr. Murphy,

    When will you offer an opinion as to whether the inflation is/could be entering the sysyem through asset prices.

    Did Mises address whether the monetary transmission mechanism entered the system through banks? Hayek certainly thought inflation hit different areas of the economy at different times.

    Why must we fight the aggregators on their battlefield of average prices (CPI) when we know the whole economy is a system of relative prices? I believe we will be perpetually misled by CPI and our arguments are undermined.

    Kind regards

  9. von Pepe says:

    The Austrians long opposed the concept of an overall price level
    and any concept of aggregate demand. “The over-all price level …
    hides the relative movements as against each other” and “these relative movements are of pivotal importance for certain cycle theories, especially for that of Professor von Hayek” (Schumpeter 1954: 1095).

  10. Anonymous says:

    My bad Bob, you were right.