The Great Deflation of 2009

Yeah, yeah, inflation’s the highest it’s been in 17 years. But Business Week‘s Michael Mandel–who is a real live Ph.D economist!–has been writing a series of blog posts making the case that it’s going to peak soon if it hasn’t already. And that next year we may actually be talking about falling prices. A sampling:

As the economy slows, the demand for commodities is going to fall. The price increases for energy and food could very easily reverse themselves over the next year. And with a weakening labor market, there’s little chance of starting a wage price spiral.

When the price of energy and food starts to drop, it will pull down the CPI just as quickly as it pulled it up.

and:

Repeat after me..services inflation is slowing, not rising. In particular, producer price inflation in the “traditional service industries” is only 0.6%, on a year over year basis, down from 1.8% in December.

But you would never know this, from the coverage of today’s PPI report. The majority of the economy is services, not manufacturing. Yet most reporters (slap, there I go again) persist in focusing on the producer price index for goods. … In fact, the BLS producer price index for “traditional service industries” is arguably the best gauge of inflationary pressures that we have.

“I could be crazy,” Mandel writes. I doubt that. Premature, maybe. But commodities prices can’t keep going up forever. (Why not? Because we’ll either produce more of them, find cheaper substitutes or the economy will collapse.)

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Independent

“But commodities prices can’t keep going up forever. (Why not? Because we’ll either produce more of them, find cheaper substitutes or the economy will collapse.)”

That is a bit of truism, an therefore indisputable. Mandel would have captured my attention if he were to propose different scenarios for how the forces of inflation and deflation will battle it out and estimated their likelihoods.
Jermaine Fanfair

That makes sense…sort of (?) It just doesn’t sound altogether likely based on that explanation. – Jermaine Fanfair
Bryan from Houston

Justin,

The real truth is that no government in the world will ever willingly allow deflation to take hold again after what happened to Japan. Volker proved that you can slay the inflation beast with enough determined interest rate hikes.

Japan provided an example of the opposite. It offered the rather scary prospect that a government could fully lose control of their economy (not that they ever fully have control to begin with, of course).

You guys can scream deflation until the cows come home. Helicopter Ben will be flying over dropping out California fire-retardation size buckets all over the country before he allows deflationary pyschology to take effect. And if it ever does, I’ll just default on my house, take the hit on my credit, and rebuy it back in cash from the bank on the court house steps. There is probably some law against that, but I would certainly give it a consideration.
Adam Florzak

Inflation due to factors of supply and demand is one thing, but inflation due to currency devaluation is another matter entirely.

Justin, you may be interested in a spreadsheet I put together awhile back. I was looking at the declining value of our dollar compared to our increasing national debt, and found a near perfect inverse relationship.

http://blog.pactamerica.com/2007/11/caveat-emptor.htm (spreadsheet at bottom of post)
Adam Florzak

The irony of this person’s theory is that effective May 1, 2008, the government just slashed the fixed interest rate on inflation protected Series I U.S. savings bonds to 0.0% (that’s right–zero percent!).

The new fixed rate, which is locked at 0.0% (zero) for the entire 30-year interest-bearing lifespan of the bonds, means that Series I savings bonds will not earn any interest at all if we ever enter a period of zero inflation or deflation in future years.

http://blog.pactamerica.com/2008/07/savings-bonds-paying-zero-percent.htm