In the US, the authorities are trying to create (moderate) inflation. They may well fail over the next year or two, but not forever. When they succeed, inflation will probably be controlled fairly quickly.
Inflation can be very bad, but a capitalistic economy requires moderate inflation (about 2.5-3%).
Deflation is much, much worse. If inflation occurs due to the “stimulus” package, that isn’t necessarily a good thing. It could simply mean that there’s just more money in the economy chasing the limited number of goods and services, causing prices to rise, BUT, the number of goods and services produced are not increasing or are actually declining. This is possible due to government spending. The standard axiom is: “Government spending crowds out private investment.” But, it can actually happen in a bunch of different ways, though not normally seen in America, like government buying up all water, food, rice, etc. and giving it to the army. (This type of activity throws off the pricing mechanism needed for the economy to run efficiently).
My (probably simplistic) understanding is that moderate inflation is good because it means that in the long term, it’s not worth hoarding money: basically, over time, money becomes worth less and property becomes more valuable (at least relative to each other) - it provides an incentive to spend money, especially on long-term investments and durable property.
On the other hand, deflation means that everything you own becomes less valuable quicker and cash becomes more valuable just by sitting in a box under your bed, meaning that the incentive to spend money decreases, and the economy stagnates.
Also, long term loans are a better deal with inflation. Think about a mortgage on a house. Now that we all know that buying a house to live in is not a source of income, why should you do it? You will pay more in the short term (down payment, fees, and monthly payments) than if you rented. But in the long term, your monthly payment is fixed, so with inflation, your monthly cost decreases over time, while your use value remains fixed. After something like 7-10 years you break even or get ahead, and at the end if you sell the house for the same real value you bought it (inflation adjusted) you only paid the interest on the property.
Same scenario with deflation, and every year your payments costs you more, and when you are finished paying off the house, you will have spent more dollars than you can get back for it, even excluding the interest. You would have been better off renting and keeping your down payment in a shoebox.
Because it is an average, not an absolute. Here are the raw numbers from the December CPI report (for just December):
Overall the inflation rate was -.7, with food -.1. Drops in the prices of transportation and Energy led the decline. But if you look at the 12 month unadjusted rate, you see overall inflation was .1 with food at 5.9. So food prices are going up, but other prices are going down.
Very interesting article on hedonics. I think I see the flaw. Hedonics adjusts for increases in quality, but doesn’t adjust for increases in expectation for quality.
It tries to claim that computers are 100x cheaper today than ten years ago even though no one today wants to buy a 10-year-old computer (and can’t buy 1/100th of a modern one). So when it’s used to adjust Social Security payments, it’s used to tell beneficiaries that they should be living the same life they have for years (buying items of the same old quality). When it’s used to adjust monetary policy, it just misses the point completely. A better measure of inflation for the purpose of tracking the economy’s heat would focus not on directly tracking prices but on seeing how prices relate to input costs, in trying to analyze the justifications and forces behind apparent changes. (So if you’re trying to track inflation in the RAM industry, where capacity doubles every two years, you would look at producers’ profits – which have gotten incredibly low and are a sign of true deflation in the sector. You wouldn’t apply hedonics to just divide price by the ballooning GBs, arriving at a figure that tells you nothing.)