I was just looking at the core CPI over the course of this year and apparently it stayed positive all year on a yoy basis. Yet the media kept reporting earlier this year we had deflation . Of course the headline plunged with commodity prices but I find questionable that the Fed and economists in general focus on the headline number when it falls to say there is deflation but ignore that very same piece of statistics when it goes up ! The deflation this year was just a reversion to the mean after the insane and engineered rise in commodities in 06-07. So deflation as seen in the headline figure was a good thing. What the Fed was really worried about thus is deflation in assets such as housing and that's a completely different thing, and again there is a double standard here since on the way up all is well, but when it comes back down they call it a catastrophe or deflation. Is the talk of deflation then just a fraud ?
The US has an excess of real estate. The US and the rest of the world have an excess labor pool... both deflationary. But BS Bernanke has stated, "... deflation is not a problem so long as you can print enough money..." What's so wrong with deflation? What's wrong with prices coming down so that people who formerly couldn't afford to buy a house or car, now can? It's GOVERNMENT who deplores deflation... it's a challenge to their deficit spending habits.
1) It's mostly real and not a fraud. 2) Deflation, during a bull market, can be good. 3) Deflation, during a bear market, can be bad. 4) The "problem" is that deflation will eventually impact the value of everything, not just the things you want it to impact.
Simple economics 101... People don't spend money in a deflationary environment. Why buy a car today if the price will be cheaper tomorrow? Deflation kills the economy. Wages also decrease during deflation so your theory of prices coming down so people can afford to buy houses and cars is incorrect.
It's simply not true to say people wait for lower prices. That doesn't happen in electronics for example. People fall all over themselves to get the lastest gizmo even if you tell them that if they waited 2 weeks they would get it 10% cheaper. As for wages, aren't they sticky ? They don't come down as fast as prices because of labor unions (which are alive and well in most parts of the world). If deflation kills the economy my guess is it 's only because corporations's profits are often lower because of inventory writedowns , and banks don't profit as much because hoarding increases over time. Long periods of deflation must be bad for the economy but I can't see how a few years of deflation would be a catastrophe. As I see it, deflation in the short run is mostly bad for the financial sector that's it.
wages are very sticky in western economies. instead of adjusting downward u end up with more unemployment. not allowing deflation results in allowing the excesses in the economy to continue. the bubbles resume until u have the crash of all times with the resultant political upheavel. inflation but not runaway inflation is the tool of the political class to steal from people and to fund their agenda. one reason that the gov't distorts inflation figures is to avoid adjusting social security payments to the elderly.
Electronics are a different animal. But you can't compare a consumer rushing out to spend a few hundred bucks on a new iPhone to consumers delaying purchases of cars and houses. You're right, wages don't decrease at the same rate. Instead, the employees are laid off. The problem with deflation is that it quickly creates a downward spiral. It's easy to say deflation for a year would be a good thing. In reality, that doesn't usually happen. Less demand = lower prices. As long as demand (price) continues to decline, consumers will wait to make their purchases. This in turn causes even lower demand...and the spiral continues. This spiral can be very difficult to break. Since such a large portion of economic activity is consumer driven, deflation seriously damages overall economic activity.