Friday, August 14, 2009

July CPI Figures Highlight Deflation Risks

The Consumer Price Index (CPI), a broad measure of the prices paid by American consumers for a broad basket of goods and services, fell further into negative territory for the month of July. The data, released today by the Bureau of Labor Statistics, corroborates the assertion made by many - including myself - that deflation poses a more imminent threat to the economy than the widely assumed inflation threat. The inflation-phobes - of which there are many - are simply unable to fathom a future that Doesn't contain rampant inflation. This primarily has to do with a certain relationship which is falsely assumed true by the public, specifically:
  1. Media headlines that have routinely contained figures in the hundreds of billions with respect to the size of Federal Reserve intervention and money-supply creation.
  2. The widely accepted belief that If money is created, Then inflation will follow.
Such analysis completely ignores what is presently occurring in the economy in general, and the labor market in particular. It is common knowledge that labor costs (wages etc.) represent the largest single expense for the majority of companies. With record numbers of unemployed individuals today, competition in the labor market is fiercely intense. That competition results in workers accepting far lower wages; a reasonable trade-off considering the alternative. Thus, the largest expense that a company faces is shrinking. Lower wages beget less consumer spending and heightened price consciousness, triggering high levels of competition for attractively priced goods and services. And so the process continues, resulting in what economists refer to as deflation. Sphere: Related Content

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