I never paid much attention to my history classes while in high school and I hope not to bore you now. The CPI, which is the Consumer Price Index, fell from a record 5.2 per cent in September to 4.5 per cent in October of 2008. This was a far sharper drop than what economists were expecting. The CPI is the Government's preferred measure of inflation. What was a major cause for such a quick drop? It was driven by the plummeting cost of oil. Gas prices are extremely lower now as in many years. What does all of this mean?
In short bursts, deflation can be beneficial for consumers as it brings down the cost of goods and services. But what can be scary is that deflation can be very dangerous if it were to be prolonged. This is even more true if it's combined with job loses. Anyone been paying attention to the big 3? With the Big 3 in trouble; Chrysler, Ford, and General Motors, there could be some serious job loses in the near future.
Another issue with deflation and the cost of goods and services decreasing in price is that it could encourage people to defer spending. Why is this? They would wait for prices to fall further. Look at people who shop for homes. This would force prices down which would creat a deflationary value that would cause wages to fall and more jobs to be cut as manufacturers and retailers cannot sell their goods.
Now, I am not here to scare you when it comes to debt, inflation, and deflation, but we need to wake up and take notice of this. Here are a few definitions, in which I cut and pasted from Wikipedia.
Inflation : "is a rise in the general level of prices of goods and services in an economy over a period of time. Inflation can also be described as a decline in the real value of money—a loss of purchasing power."
"When the general price level rises, each unit of currency buys fewer goods and services."
"Economists generally agree that high rates of inflation and hyperinflation are caused by an excessive growth of the money supply."
Deflation : "Is the decrease in the general price level. Economists will refer to a decrease in the money supply and credit. Deflation is considered a problem in a modern economy because of the potential of a deflationary spiral and its association with the Great Depression."
"In economic theory, deflation is a general reduction in the level of prices, or of the prices of an entire kind of asset or commodity. Deflation should not be confused with temporarily falling prices; instead, it is a sustained fall in general prices."
So, where am I going with all of this????
Consumer prices are dropping.... In my opinion, deflation is worse than inflation because when nothing holds its value, then you can't get a loan to buy anything...... Hence why so many inside and outside the media are saying that there is no mortgage money to lend. This is not the case at all, which I talk about here. People, mortgage money is still available. And once you buy it, it's worth less immediately... so why would you lend when you know an asset is worth less? Chairman Bernanke has recognized this... he has cut interest rates. The European Central Banks haven't recognized this as of yet.. The Chinese have not recognized this issue as of yet also and they have their interest rates sky high as if inflation is the problem. Every asset in the world is losing value now, except US Treasuries. This is exactly what happened in 1932 to 1938. Hhhhmmmmm What took place around then? The Great Depression
On another note about debt, I wrote a post back in January for Active Rain called the 2007 year in mortgage review. I talked about a slight recession and that I felt that we have been in one for the last 3 years. From Wikipedia, a recession is "a period of reduced economic activity." What all this leads to is robbing Peter to pay Paul in many cases.
And think about this in regards to a recovering economy... Can a bad economy make us fat? With eggs, milk, and bread costs rising, will fast food and cheaper food at grocery stores lead us to a greater waste line? McDonald's reported a whopping 11% increase last week in 3rd quarter sales in 2008 compared to 2007.
Also, stressful times can lead to stressful eating. I know I eat more when I am stressed. And with the bad news in regards to the economy and so much more, what could it lead to for you? No pun intended, but this is just food for thought.
Overall, just things to ponder about. We can't ignore these issues. But at the same time, you can't stop living also. And we also need to be careful of hyper-inflation.
I will say this again, it's a great time to buy now. Home values are down. Rates are still low, in the low to mid 6's. Values will increase in the future. The stock market will rise in the near future. Words of advice? Don't be the one that sat on the fence to long and missed, kicking yourself.
For a very good take on Inflation vs Deflation, please read the Myth of inflation vs deflation by Vincent Bressler.
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Copyright © 2008 by Jeff Belonger
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Very detailed post with lots of good information.