RSS
Home
Price declines in our future
Print
Email
RSS
Subscribe
CPI
By almost any measure, most alive today have only experienced persistently rising prices. Consumer prices, as expressed by the Consumer Price Index (CPI), have risen since approximately 1940. What accounts for the rise in prices? Is this just something destined to occur? An article on money and economic inflation, of which CPI is one measure, illustrates the cause of what we understand to be price increases. The included chart, provided courtesy of The Federal Reserve Bank of St. Louis, illustrates the progression of consumer prices beginning in 1913. Readers will note how prices really took off after 1970. What happened around 1970 creating the lift off in prices? In 1971, President Richard Nixon took the United States off the gold standard and forever changed the inflationary dynamics. While history will remember him more for Watergate, I will remember him more for altering currency relationships in ways that eventually placed all economies in peril.
Something interesting happened though with the financial crisis post the stock market top of 2007. In late summer 2008, prices as expressed by the index peaked. Such an occurrence was not witnessed by consumers since the Great Depression. See the next chart for an illustration of the dramatic CPI fall. 
The economy arrested the fall in the price index at the beginning of the year and while it is increasing, it is doing so at a lesser pace than previously. When the financial crisis occurred in the fall of 2008, the government and the Federal Reserve took extraordinary measures to stimulate the economy. The stimulation provided money (artificially created) into the economy since money was already withdrawn by consumers who were in retrenchment mode. That stimulation revealed itself in some manner in the CPI. Are government measures enough to arrest future declines in the CPI? Is a lower CPI good for the economy?
The state of Colorado recently lowered their minimum wage in response to a fall in living costs. It is the first state to do so. Other states have not followed suit for fear of a backlash. During the Great Depression, artificially high wages constrained job growth. The same will occur during our crisis if wages are not kept in line with prevailing price levels. For Social Security recipients, the CPI drop was met with a declaration of no cost-of-living (COLA) increases for 2010. The President and Congress took this as an opportunity for further economic stimulation by proposing to ameliorate the lack of COLA adjustment by proposing a $250 payout to Social Security recipients.
Price decreases are in our future. The prevailing deflationary environment will greatly reduce asset values and other items (inclusive of CPI components) where inflation reigned.
Jim Mosquera is the author of The Sentinel Economic and Financial Newsletter.
Related Articles:
Add a Comment
