A friend of mine who reads all those financial magazines says the experts claim we’re actually seeing negative inflation in these slow economic times. C’mon! Who are they kidding? Do they shop the grocery stores, or what? And, do they account for shrinking cartons, like the half-gallon ice cream carton that now rivals the pint?
You cannot tell me we’re seeing negative inflation. How do they play with the numbers to support this double-speak?
The most commonly used measure of inflation is the Consumer Price Index. Inflation is tough to measure accurately, and there’s a lot of thought and statistical wrangling that goes into it to get a picture that’s untainted by the sort of personal bias that often happens when people try to eyeball changes in prices based on their own impressions. Selection bias can be a real problem. But in this case, you happen to be right. We are not currently experiencing deflation, at least according to this measure.
If you have more questions about how the CPI is calculated, the website has a decent FAQ that covers most points. If things are still fuzzy after that, we can try to help with more info if you specify what’s still unclear.
Thanks, Hellestal for the links. It confirms my suspicion that, once again, you can twist the numbers anyway you want. So, while we starve with rising food prices, we can at least all feel good about it!
However, only one of the months of 2009(March) showed negative inflation.
Year on year inflation being negative for most of the year was largely caused by falls in prices in Oct - Dec 2008. Only one of the months of 2009 was negative (-0.1% in March), but changes were small in most of the other months, so the fall at the end of 2008 affected the annual rate significantly. We have seen the 2008 numbers start to fall out of the annual figures. The November CPI rose to 1.8% mostly because the -1.7% from November 2008 dropped out. Even if prices were flat in December 2009, inflation will have risen because the -0.8% from December 2008 will drop out.
If you check the first cite I provided, you can see that the (unadjusted) 12-month difference in food prices is negative. Which is to say that food prices have dropped a touch.
This is a national sample. It will not necessarily reflect your particular region, or even your particular grocery store, and so it does not indicate that food prices have been dropping for you in particular. But it does indicate that food prices, on average, dropped for most people across the country for the time period, even if only a tiny bit. And it’s especially worth remembering that food prices tend to be a bit volatile. They swing up and down, and it’s much easier for folks to remember the increases than the decreases. It’s not number twisting to take accurate long-term measurements. Careful measurement is necessary to avoid selection bias.
When I see inflation figures I just scratch my head. What the hell are the determiners measuring and how does it relate to real life.
I’ll try to explain:
What if, over a 10 year period, you have the following:
A take out cup of coffee goes from 50 cents to $1.29.
Gas goes from $1.90/gal to $2.90/ga/
A house goes from $250k to $260k.
Interest rates drop from 4% to 3%.
A trip to the dentist goes from $100 to $175.
Calling a plumber goes from $80 to $175.
An ice cream cone goes from 75 cents to $2.
An airline ticket goes from $129 to $350.
An 50" flat screen HD TV goes from $6,000 to $2500.
A laptop goes from $1,000 to $500 (and the later one is a better machine).
A cab ride goes from $3.50 to $6.00.
A bridge toll goes from $3.00 to $5.50.
Hiring a nanny goes from $350/wk to over $550/wk.
The price of clothing remains about the same.
A good ticket to a prime entertainment event goes from $50 to $200.
Tuition at a private school goes from $10k to $25K.
Your kid’s after school activities go from $50/wk to $150/wk.
The communications companies (cell phones, internet, etc.) which were a luxury in the past, have almost become a necessity and they are continually gauging. How do you apply this? This isn’t about the cost of a 5lb. bag of flour.
and on, and on, and on.
So how do you make sense of it? What is the real cost living at a moderate level? What is inflation in respect to living at a level of moderate expectation? I think that any of the usual indexes are unrealistic. They don’t really apply to anyone.
It’s important when looking at US CPI figures to remember that both food and fuel are EXcluded from those calculations. Their hypothetical family of consumers never eats, never drives, and never heats their house.
The rationale for this is technically sound in that both food & fuel prices often have 10-15% fluctuations, so any inflation numbers which directly included them would be so bouncy as to be meaningless. You couldn’t pick the signal out of the noise.
So they ignore those things completely, and assume that the long-term (ie 12-24 month) prices of everything else will incorporate any lasting changes in food or fuel. e.g. if fuel rose to $4.00/gallon & stayed there, the price of a Fedex shipment, a cab ride, an airline ticket, and a boatload of made-in-China clothing would all eventually go up in response to the increased cost of fuel. And *those *price increases *do *figure into the CPI.
The side effect of this statistical decision is that permanent changes (up or down) in food and fuel costs affect the consumer’s wallet a couple years before the appear in the official numbers.
And for folks with a working-class or lower income, a 10% change in the prices of what they spend 90% of their income can have a huge practical impact.
Not so. The headline CPI does include food and energy. The press release already linked toshows a breakdown of inflation by component and it includes both food and energy. The BLS does also calculate an index that excludes food and energy, which gets a mention near the bottom of the press release, but the index used most includes them.
That’s not deflation or inflation. That’s simply a adjusted valuation of an asset on the open market. The housing values shot upward outpacing real incomes and formed a bubble. Everyone finally realized it was an illusion and the values crashed – a correction. That’s not deflation.
Deflation is the amount of money circulating in relation to the amount of actual goods in the economy.
If an A-list actor was commanding $20 million per movie and then had a 2 or 3 movies flop, and now he’s only able to ask for $5 million per movie. That’s not deflation.
Without weighing in on the main question at all, price stickiness is both interesting and confounding when determining inflation and deflation. Some price levels, including wages, are resistant to change. Imagine, for example, that price levels have fallen 10%. Even though a 5% pay cut at the end of the year would still represent a raise in real dollars, many people would be resistant to taking such a pay cut.
Grocery store prices for things like prepared food tend to be fairly sticky, whereas produce at e.g. farmer’s markets would tend not to be. It can be difficult to gauge price levels based on a single supermarket.
IANAE, but deflation is commonly described as the purchasing power of money being greater in the future than it is in the present. If the prices of things are falling, that means that you can buy more with your money, hence deflation.
To be precise, the “purchasing power of money” is the result of money supply in relation to actual real goods.
But you have to make a distinction of why prices are falling for particular items. When prices fall because of consumer preferences, or because of technological advance, that’s not deflation. When prices fall because there’s less money circulating in relation to actual goods, that’s deflation.
Your definition of deflation is too vague and one could use it to point to any and all lower prices for any products as examples as “deflation.”
If you actually looked at the link, food prices have fallen this year (i.e. there has been deflation). It’s not fair to say you can ‘twist the numbers any way you want’ either: economists try very hard to get a ‘basket’ of goods which represents the economy on average. They use a complicated model based on dozens of the most commonly purchased products as indicators - it’s a much more accurate way of determining price changes than looking at the price of some groceries in your local supermarket and saying, ‘they’ve gone up! There can’t be deflation!’. More importantly they use the same model every time, so they get a fairly equal comparison from month to month.
The point of the model is that it provides useful macroeconomic information: it has been refined again and again to reflect the average basket of goods in the economy as closely as possible. There is a powerful incentive for the measurement to be accurate, because otherwise policymakers will be reacting to inaccurate data. There may be blips and deviations, but I think the CPI broadly gets things right: if it says inflation is rising steeply, because of say, a sharp rise in fuel prices, it’ll be right, and policymakers can respond accordingly. I doubt the scenario the OP is imagining would ever arise: where the CPI says the economy is in significant deflation, when in fact the price of everything, nationwide and on average, is going up. It’s a much cleverer model than that.
This is solid economic reasoning, but just a bit misfocused. The problem is that the data, when looked at in aggregate from a broader perspective, does not support price increases as much as you’d think.
Housing prices shot up with the bubble, and then collapsed again after the crash. But an accurate measure of inflation isn’t going to concentrate on house prices specifically, which mostly just measures the value of already existing assets. Rather, inflation is going to concentrate on the price of renting as amarone has already mentioned. New housing construction isn’t even included in GDP figures as “consumption”. It’s included as “investment”. What matters for consumers is the rent they pay, either to their landlords or even the “rent” they pay to themselves for owning their own house (which must be estimated from similar properties rented in your neighborhood, since you wouldn’t write a contract to yourself to allow yourself to live in your own home).
And the fact is that rents were relatively stable throughout the bubble. That is, in fact, one of the key pieces of evidence that responsible financial observers were pointing out as demonstration of the housing bubble. Housing prices were increasing rapidly, but rents were not. Hence, bubble. This is sorta like the housing equivalent of looking at price per earnings of a stock to see if it’s overvalued. And houses were very over-valued, but the market just wouldn’t listen when people were pointing this out.
This has already been discussed, but what you’re talking about is called “core inflation”. But core inflation, while sometimes useful, is not used as much as the broader CPI that includes more volatile prices like food and energy.
Technically, it doesn’t matter why prices are falling. Deflation is simply a general decrease in prices. But in effect, technology improvements or changes in consumer preferences are only going to affect one or two industries at a time, and so they won’t result in a general decrease in prices.
Part of my compensation at the big airplane company I work for is a COLA which is based on the rate of inflation as one of the main factors. Since returning to work at the end of November, 2008 after a labor dispute, our COLA is now at -$1.83 (yep, minus a buck eighty three) an hour. The only reason we haven’t seen a reduction in pay is COLA losses can only come from previous COLA gains and we haven’t had an increase since our current contract was ratified. But before we see any increase in pay due to a COLA increase, the $1.83 in negative COLA has to be wiped out by increases. Our union has stated that we likely will not see any increase in pay based on COLA during the life of this contract which runs till September of 2012.