Your Thanksgiving dinner will probably cost more this year than last, thanks to bad weather that reduced crop sizes. (Hat tip to Jim Kappler, Paycheck Economics.) Food prices in September rose 1.4%, after declining for about a year. Gas and oil prices went up 5%, according to the latest Consumer Price Index (CPI). Overall, prices have gone up 1.1% compared to last year. (Source: BLS Consumer Price Index: September 2010)
However, the core inflation rate was only .8%. Why is this important? A healthy, growing economy can sustain a core inflation rate of around 2%. Core inflation measures prices without volatile food and energy costs, which is why the Fed watches it more than the overall inflation index.
A core inflation rate of only .8% is bordering on deflation, which is when prices fall. Deflation is an ongoing symptom of a slow-growing economy.
What It Means to You
Rising food and oil prices, and low prices in everything else will feel more threatening than it really is. That's because you notice higher gas and grocery prices, because you shop for them each week, and the prices are very sensitive to supply. The prices can change in response to supply because the demand is inelastic. That means people need to buy gas and food, and can't really cut back on demand when prices rise.
Low prices for other things, like clothing and other consumer products, are a symptom of sluggish demand. What's keeping demand down? Lack of confidence in future income potential and/or wealth. People aren't out buying like they used to because they are either unemployed or afraid of losing their job. They've also lost a great deal of wealth in their home equity or savings/investments. They can wait to buy new clothes, or spend less, and so demand is elastic.
Until people regain confidence in the economy, prices will remain flat. The only exception to the rule is with stagflation. That could happen as the value of the dollar declines, which would raise the price of imports.
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