Deflation Greatest Threat to U.S. Economy Right Now

The Bureau of Labor Statistics (BLS) reported that the Consumer Price Index (CPI) for October 2008 dropped 1%, the largest monthly decline since the Index was created in 1947. The decline was caused by an 8.6% decrease in energy prices. This really just confirms the deflation our economy has already experienced - 46% (and falling) deflation in the Dow, and a 27% deflation in housing prices, neither of which are measured by the CPI. In fact, the CPI reported that prices were still 3.7% higher than October 2007, which indicates inflation rather than deflation. (Source: BLS Consumer Price Index: October 2008)

The core CPI, which excludes food and energy, was 2.2%. This is the inflation rate that is watched by the FOMC when it decides at its monthly meetings whether to raise the Fed Funds Rate. However, the Fed is correctly responding to the current crisis, not the CPI, and dropping the Fed Funds rate rapidly. In other words, the CPI has become irrelevant as an economic indicator in this crisis. Read more about the Fed's actions in Banking Crisis.

What It Means to You

The only upside to deflation is that your cost of living will decline. Unfortunately, it also means that the value of everything - including your value as a wage earner - could decline even further. Your best bet is to improve your job skills and marketability, cut costs and pay off debt, and consult with a financial planner about your retirement portfolio. Here are some articles to help you do just that.

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