15 Sep 2011

Waiting for Godot Deflation

Economics, Inflation 14 Comments

It’s that time of the month, when the BLS gives us the official price statistics. Relying on both the PPI and the CPI releases, here’s the breakdown. From August 2010 to August 2011, we had the following increases in these categories:

Consumer Goods +3.8%
Finished Goods +6.5%
Intermediate Goods +10.3%
Crude Goods +18.4%

It’s weird. It’s almost as if prices can go up, even with slack in the economy. I must be reading those press releases the wrong way…

14 Responses to “Waiting for Godot Deflation”

  1. gienek says:

    I’m expecting to read a blogpost from professor Krugman, in which he will claim that the BLS has been infiltrated by those pesky Austrians, hence the numbers indicate inflation.

    • bobmurphy says:

      They want to avoid a public grilling by Ron Paul. He’s intimidating them.

  2. Secret Agent says:

    It’s weird. It’s almost as if prices can go up, even with slack in the economy.


    Why oh why do so many people believe in the myth that prices cannot rise due to printing money despite there being “idle resources” and unemployment?

    It’s like labor and capital are not homogeneous, or something.

  3. Martin says:

    Bob, what does it indicate when the goods farthest away from the consumer are the goods that rise the fastest in price? It looks to me as if profit-margins are being squeezed.

    I graphed it but I don’t really know what to think of it otherwise: http://research.stlouisfed.org/fredgraph.png?g=2dt

    CPI (all goods) – PPI Finished goods

    • gienek says:

      I think it’s a logical consequence of how the new money enters the economy: Banks -> Businesses who buy capital goods.

    • marris says:

      I think it means inflationary recession. That is, businesses will go bankrupt if their revenues don’t keep up with these increased costs. I dunno, maybe unemployment will increase further.

    • david nh says:

      Perhaps it reflects the fact that a shift from consumption to savings is also a shift from consumption goods to investment goods (i.e., a shift from the production of current consumption goods to the planned production of future consumption goods). The shift bumps into capacity constraints which can only be relieved over time – hence the large price increases at the wholesale end. Maybe?

    • Jon O. says:

      Yes it’s margin compression to certain segments of the economy. It’s been going on for some time now.

      Also look at wages, real-estate prices, and returns from most financial assets relative to the non-discretionary parts of the core. Consumers are getting squeezed, especially those with less disposable income.

      Clearly, accommodative policy is helping the masses; unless you’re part of the tiny minority that rely on non/under-indexed fixed income, save money, and/or spend money on luxuries like food, energy, insurance premiums, tuition, and medical care.

      That said, we’ll probably get a period of dis-inflation soon as some of the current problems feed through.

    • Martin says:

      I thought about this, and I wondered: how would it look when idle resources are being mobilized?

      @marris, profits were at an all time high, if I recall correctly? So this squeeze is merely reducing margins that had increased.

      @gienek, yes that’s what I was thinking too.

      @david nh, It should be, otherwise you get excess savings. However why is this happening now and not earlier when people shifted out of consumption and investment?

      @Jon O. “That said, we’ll probably get a period of dis-inflation soon as some of the current problems feed through.”

      Why? What do you mean by current problems?

  4. Dan says:


    M2 from May to August is at 23.3 SA annualized
    M2 from June 6th to September 5th is at 17% SA annualized
    M2 from June 6th to September 5th is at 12.9% NSA annualized

    The Bernank must be about ready for the famed exit strategy by now, right? Either that or he’s thinking time for QE3. I guess we’ll find out after their meeting this month.

  5. krugmans only defender says:

    #@*% u bob u dont get it

  6. Gee says:

    Baby Bobby, you find your pacifier yet? Every time you use the word Deflation you are talk about prices and nothing else. You believe that deflation can’t be accompanied by price increases, correct? What a simple world you live in.

    Why don’t you just admit that your definition of Inflation is increases in prices and we can direct the discussion to how useless such a definition is.

    • Rick Hull says:

      Most Austrians define *flation in terms of the money supply. Murphy is addressing the mainstream, gov’t endorsed definition as regards the official price level indices. Consider it “playing the devil’s advocate” by granting your opponent’s premises and still proving them wrong. Thanks for playing.

  7. Tel says:

    Inflation is essentially taking money by stealth, and if people actually know the deal, then it isn’t stealth any more. So you can always expect inflation to be under reported. For the most part you will find the media concentrating on consumer goods, whereas family budgets are dominated by food and fuel.

    I’d also like to point out that from a government point of view, inflation is always preferable to deflation. If they ever get themselves into a pickle they will choose inflation every single time. Deflation is fundamentally associated with lack of confidence in the system — business going bankrupt, shareholders getting a few cents in the dollar, people losing their jobs, mortgages going bad, etc, etc. Any government delivering deflation to the voters will be looked upon as a bad government.