Friday, January 16, 2009

Consumer Prices Fall 0.7 Percent

The latest CPI report showed that prices fell 0.7 percent in December. While this likely will have people worried about deflation, that isn't the problem yet. To fully understand what is happening with the CPI numbers one must look closer at the underlying data. Tim Iacono from The Mess That Greenspan Made attempts to weed through the information and provide some insight for us in his blog post below.

The Labor Department reported that consumer prices fell 0.7 percent last month but rose 0.1 percent during all of 2008. As is the custom, the monthly figures use seasonally adjusted data while the annual inflation rate gets the non-seasonally adjusted variety.
IMAGE Interestingly, as indicated in the chart above, the seasonally adjusted data now shows a 0.1 percent annual decline in prices.

And you know what that means...


No not really.

A 0.1 percent decline in the Consumer Price Index would be better characterized as follows:


The big red bold type should be reserved for real deflation as was seen in the 1930s, not the Japan style "baby-deflation" where the enlarged font really only serves one purpose - to give governments and central banks license to print money at astronomical rates to once again forestall the inevitable end of another system of pure fiat money.

They always end badly ... but, the current one still has a ways to go.

Don't confuse an energy-induced downward spike with deflation as your grandparents or great-grandparents knew it - they are entirely different things. And they will still be entirely different things in the months ahead as lower energy prices push CPI-inflation lower. Remember, this summer we'll be comparing last year's $4 gasoline to something about half the price.

You can see just how much tumbling energy prices affected overall inflation last year. Shown below are the monthly and yearly changes across all CPI categories - many prices continued to rise through 2008, notably food (up 5.8 percent), education (up 3.6 percent), and medical care (up 2.6 percent).
IMAGE And yes, amid all the talk of deflation and plunging home prices, owners' equivalent rent (the consumer price index substitution for the cost of home ownership) continued to rise, up 0.1 percent in December and 2.1 percent higher than where it began the year.

Maybe some day, some brave young economist somewhere will successfully challenge what others haven't had the gumption or common sense to object to - how owners' equivalent rent has made a laughing stock of the government's consumer price index (it accounts for nearly 25 percent of the headline inflation number) and, in the process, greatly contributed to the worst financial crisis since the Great Depression.

This post can also be viewed at

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