Friday, January 16, 2009

Deflation Confirmed

The government released December's CPI today, which shows another month of decrease, at 1.03%.

The updated table for the last year is now:
MonthMonthly Inflation Rate
January 20080.50%
February 20080.29%
March 20080.87%
April 20080.61%
May 20080.84%
June 20081.01%
July 20080.53%
August 2008-0.40%
September 2008-0.14%
October 2008-1.01%
November 2008-1.92%
December 2008-1.03%

The average for the last quarter is -1.33%, which annually would be about -16%.

I looked over the CPI back to 1913 and it's very hard to find any comparable period. The best comparison I can find is 1929 to 1933, in which the deflationary period was followed by an inflationary period. And of course, we now know that time as the Great Depression.

A big difference is that back then the deflation was preceded by a huge inflationary period, which we haven't seen here yet. I've charted the raw monthly inflation rate from 1913 to 2008 -- the red line is a rolling 3-month average, and the blue line is a rolling 12-month average. Note the 12-month average hasn't dipped into deflation for 50 years, though we're just above it now. If January's CPI has a comparable drop, the 12-month average will drop into deflation.

Here's the chart (it's very wide, so you can scroll left and right if you click on it). Red is the 6-month average, blue is the 12-month average (when I first posted this I incorrectly labeled the red as 3-month average).

News reports are saying silly things like:
The Consumer Price Index dropped 0.7 percent in December, a third straight monthly decline, capping a year in which prices advanced only 0.1 percent -- the weakest 12-month reading since December 1954, the Labor Department said.

"Deflation is just around the corner," said Meny Grauman, an economist at CIBC World Markets in Toronto.

"With the U.S. economy roughly one full year into a deep recession, the prospect of deflation is a concern for another time, especially on a day when the U.S. government has decided to inject billions more into the U.S. banking system."

Watch out folks, here it comes.

1 comment:

Big Jay said...

That's the thing. It terrifies the fed and the treasury to have deflation. You know, because they can't do anything about it. Do we really need to 'fix' deflation? A little deflation might be a good thing.