August 3, 2005

WITH A REPUBLICAN PRESIDENT THERE CAN BE NO GOOD NEWS:

The Big News That We Miss: Inflation is now running in the low single digits. We take this for granted and forget how much its steep drop has helped stabilize the economy. (Robert J. Samuelson, 8/08/05, Newsweek)

We in the news business often miss big stories because they aren't announced by a corpse, scandal, invasion or controversy. One important story we're missing today is the absence of sharply higher inflation. Look at the numbers. For the past 12 months, the Consumer Price Index (CPI) is up only 2.5 percent; since 1997, annual increases have averaged 2.4 percent. So-called core inflation—stripped of volatile food and energy prices—have behaved even better. In 2004, it was 2 percent; recently, the annual rate has been running at about 1 percent. The significance of these drab statistics may not be immediately obvious, so let's explain. [...]

Even many experts are surprised by the economy's new inflation immunities. "A year and a half ago, almost every forecaster thought inflation would be higher," says economist Nariman Behravesh of Global Insight. One reason that higher oil prices haven't yet crippled the economy is that they haven't triggered a widespread jump in wages and other prices. There are many theories to explain the economy's greater inflation resistance: stiffer competition, higher productivity, greater globalization and "slack" in labor markets. All may be partially true.


Mr. Samuelson actually understates the good news, Reagan and Volcker ushered in a defaltionary epoch.

Posted by Orrin Judd at August 3, 2005 9:20 PM
Comments

Are you saying deflation is good? Don't show off your ignorance. Deflation is the economic equivalent of sugar in a gas tank.

Volcker: wasn't that the guy Carter hired?

Posted by: Rick Perlstein at August 3, 2005 11:49 PM

Please look up the word "deflation" in an economics textbook. You'll find it's the equivalent of sugar in a gas tank.

Volcker: isn't that the guy Carter hired?

Posted by: Rick Perlstein at August 3, 2005 11:56 PM

Slowly now. "Deflation" is how economists describe the situation in which no one buys anything because they know the price will fall if they buy it the next day, and the economy grounds to a halt. It's a technical term, used here incorrectly. It doesn't mean "stuff's gettin' cheaper!"

Posted by: Rick Perlstein at August 4, 2005 12:14 AM

Rick:

That's one kind of deflation, and indeed unhealthy. It's not the kind we're enjoying these days.

Here's a handy rule of thumb--if you're going to try and be condescending try to know what you're talking about.

Posted by: oj at August 4, 2005 12:19 AM

that mustt be what killed all the people in russia and china -- they were waiting for the price of food to stop deflating and just let it go a little too long.

Posted by: cjm at August 4, 2005 12:20 AM

Rick: I am quite sure that the digital camcorder I bought last month could be had for half the price in 6 months. And yet I still bought it...

Posted by: b at August 4, 2005 12:05 PM

You'll find it's the equivalent of sugar in a gas tank.

Inflation and deflation are both destructive, especially in extremes. The advantage of deflation is that its pain is felt obviously and quickly (and its gains are much less obvious and slow), whereas the dangerous effects of inflation are much more insidious and slow-acting, and in the short term people see some of its advantages. (Or perhaps more precisely fall for money illusion.)

Therefore the natural bias of society is towards inflation, and too much of it. It well-befits society for the bank to have a natural bias against inflation in order to balance it out.

Posted by: John Thacker at August 4, 2005 12:20 PM

John:

So is increased productivity destructive?

Posted by: oj at August 4, 2005 2:34 PM

Inflation and deflation are monetary phenomena. If prices are rising for any reason other than an increase in the money supply, then that's not inflation. If prices are falling for any reason other than a decrease in the money supply, then that's not deflation. Gas costs more, but that's not inflation. Walmart charges less, but that's not deflation.

Posted by: David Cohen at August 4, 2005 4:26 PM
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