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Kimberly Amadeo

Deflation + Inflation = Deinflation?

By July 15, 2009

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The Bureau of Labor Statistics (BLS) reported that the Consumer Price Index (CPI) for June was down 1.4% from the prior year, the largest decline since 1955 and a signal of deflation. However, the drop was largely due to a 25.5% drop in energy prices. Food and other prices continue to rise at a time when consumers can least afford it, causing mild inflation. Perhaps we need a new term - deinflation. (Source: BLS Consumer Price Index: June 2009)

What It Means to You

Food prices rose 2.1% and medical prices rose 3.2% from a year ago. Lower oil prices and transportation costs are not being translated into lower prices across the economy. This means you will feel the impact of higher prices, even though the government reports say we are in a deflationary period. Deflation is being felt, however, in many areas not measured by the CPI -- home values, retirement portfolios and wages. These are also the areas that contribute to income and wealth for most of us.

In other words, we are experiencing inflation and deflation at the same time. I agree with "The Capital Spectator" that the economy "will be far more complicated and nuanced in what we expect will be an extended period no/slow growth." Nothing as simple as stagflation, which was massive inflation with slow growth. Instead, we are experiencing high prices in things we need, lower wealth and an extended period of slow growth before the economy emerges in a healthier form.

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Comments

July 22, 2009 at 7:29 pm
(1) Norm says:

Kimberly:

You hear Bernake and some others saying they’re worried about deflation. Are they crazy?

Here’s a chart of the CPI-U index (all items) for several decades — this is the cost of living index:

http://numbrary.com/sources/ac1ea3ca2d8c-cpi-all-items-us

See the blip at the end. That’s the deflation we had for three months of the recession in Oct., Nov, and Dec of 2008. Since then, the six months in 2009 have all been up or close to zero. The average inflation so far this year is 2.5 percent. The inflation in June 2009 was 8.4 percent annualized.

Here are the month over month percent changes in the CPI-U index for 2009:

Jan +0.3
Feb +0.4
Mar -0.1
April 0.0
May +0.1
June +0.7

You don’t hear this in the news because they always report year over year inflation, and there was a very high rate of inflation in the middle of 2008 to compare the current rates to. These figures I’m giving you are month over month figures. They show we have inflation now. It’ll be a few months before you start hearing it from others. Then it will be unanimous. The concern then will be inflation, not deflation.

Norm

July 28, 2009 at 1:12 pm
(2) Kimberly says:

Hi Norm,

You raise a good point about inflation, although I got 1.36% for the first six months of this year. This is partly due to higher oil prices since January. It is still of concern that, despite a recession, we are experiencing higher prices in consumer products, such as food and medical expenses. At the same time, we are experiencing lower income and wealth.

Kimberly

July 28, 2009 at 7:42 pm
(3) Norm says:

Hi Kimberly:
I see how you arrived at your average inflation figure of 1.36% for the first half of 2009, and accept that your method of subtracting the inflation index at the beginning of the year, from the index at the end of the year, and dividing by the beginning of the year index (214.5 – 211.6 / 211.6), is a better way of figuring it than the way I did.

Thanks for your excellent Blog, which provides economic information in such a clear way.

Norm

July 28, 2009 at 10:39 pm
(4) useconomy says:

Hi Norm,

Thanks for your comments! I so appreciate your detailed interest in the economy.

Kimberly

September 27, 2009 at 12:48 pm
(5) LJ Miehe says:

Here is an article I did on my “Theory of Deinflation“. Fixed assets decline in price while the artificially low interest rates force speculation that shows up in areas that are considered “inflation hedges” and that is also fueled by federal budget deficits, bailout programs and stimulus programs to combat a declining economy.

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