On Wednesday, the Labor Department reported that in March the consumer-price index slipped 0.4% below its year-earlier level, the first decline in over 50 years. The “core” CPI, which excludes food and energy prices, was up 1.8%, but it is possible that even people who don’t drive or eat could see price declines in the months to come.
Many people in today’s economic crisis might welcome an across-the-board cut in prices. Deflation should not be confused with a temporary fall in prices; instead, it is a sustained fall in prices that occurs when the inflation rate passes down below zero percent. Why is deflation bad? Well, to put it as simply as possible — when prices fall it’s good for you in the short term. But when companies have to cut prices, this means there is less revenue and less profits, meaning less to spend on things like employee wages and capital investments. Therefore companies need to layoff employees in order to cover expenses and now even less people have money to spend on goods and services, leading to another round of prices cuts, meaning less profits…well you get the idea.
The cure for deflation? In 2002, Ben Bernake’s publicly-declared remedy was to cut taxes and inject a lot of money into the banking system (basically printing new money and handing it out) which is pretty much what is happening now. Many economists fear that this cash injection will lead to runaway inflation, which is also not a good thing (something we saw in the summer of 2008, when the cost of essentials got out of hand).
Most people are familiar with the concept of inflation. Inflation is a rise in the general level of prices of goods and services in an economy over a period of time. Today, most economists favor a low steady rate of inflation. Low (as opposed to zero or negative) inflation may reduce the severity of economic recessions by enabling the labor market to adjust more quickly in a downturn, and reducing the risk that a a credit or cash shortage (sound familiar?) in the banking system prevents the Fed from stabilizing the economy.
In my lifetime, I don’t ever remember the U.S. being in a period of deflation (Apparently, that last time was in the Great Depression and the Post-WWII era). In good times and bad, we’ve always been in a period of inflation – even in the dot.com boom and the real estate craze. I don’t pretend to understand all the nuances of the economy, as a matter of fact, my head’s been spinning like a hamster in a wheel trying to figure out everything that’s going on.
Deflation is just one more economic term for me to wrap my head around, but the fact that the last time it happened occurred in the Great Depression is not encouraging. I welcome all opinions – please comment.
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You said: “Inflation is a rise in the general level of prices of goods and services in an economy over a period of time. ”
No, it’s not.
Inflation is a rise in the money supply – like the current administration creating trillions of dollars which previously didn’t exist. As people notice their money isn’t worth as much as it used to be (since more is in circulation), prices must be raised since the money isn’t worth as much – a Honus Wagner baseball card is worth $$$ because only a few exist, if thousands or millions suddenly appeared overnight anyone holding one would notice it’s not worth anything anymore. The same principle applies to money (dollars) – by creating trillions in new dollars, it’s a guarantee of rising prices in the future.
Rising prices is a *result* of inflation (not the cause) – inflating the money supply and causing it to be worth less, so you need more dollars to have the same purchasing power.
The Obama administration is attempting to fix the problems caused by credit expansion and deficit spending by …. credit expansion and deficit spending, inflating the money supply in the process. Rising prices will be *one* result of their inflationary policy, as the dollar becomes worth less.
For a graph of just how bad the inflation has been, see:
http://research.stlouisfed.org/fred2/series/AMBNS
I got my official definition of inflation from Wikipedia, who listed 4 different sources as the basis of their definition. I’m going to stand by my explantion.
I’ll put it simple, Deflation is good, Inflation is bad.
http://theageofstupidity.blogspot.com/2009/02/fallacies-of-deflation.html
I thought I’d revisit this blog post and give you a link I saw about the economist’s debate over deflation vs. inflation:
http://money.cnn.com/2009/06/23/news/economy/inflation_deflation_debate/index.htm?section=money_latest