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Kimberly Amadeo

Economy Deflating Like a Giant Balloon

By August 17, 2009

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Can you hear the giant hissing sound? Prices dropped 2.1% in July, slowly letting value out of the economy like air out of a giant balloon. This was the largest decline since 1950, according to the Bureau of Labor Statistics (BLS).

Most worrying is a .7% decreasing in rental prices, revealing continued deflation in housing. Look for continued high foreclosures in the months to come.

Keep in mind, the drop in the Consumer Price Index (CPI) was largely due to a 28% drop in energy prices. Food and other prices continue to rise at a time when consumers can least afford it, causing mild inflation in the things we need the most.

(Source: BLS Consumer Price Index: July 2009)

What It Means to You

Food prices rose 1.1% 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 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 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. 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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