National Commentary

The CPI Trends Toward Deflation

This week’s reported lowest growth in the Consumer Price Index (CPI), minus food and energy costs, thus continuing a precipitous downward trend in the last year, has set off a new round of alarm signals among economic policy insiders.

This week’s reported lowest growth in the Consumer Price Index (CPI), minus food and energy costs, thus continuing a precipitous downward trend in the last year, has set off a new round of alarm signals among economic policy insiders.

Further confirming the outlook of Nobel Prize winning economist Paul Krugman, the downward trend is still officially “disinflation,” and not outright “deflation,” but the spectre of actual deflation now looms large.

The popular wisdom contends that inflation is a bigger problem, and that the extraordinary move by the Federal Reserve last week to pump hundreds of billions of new liquidity into the monetary system will set that off.

The reality is, however, that the Fed’s move was a desperate attempt to fend of deflation, the dreaded threat of an uncontrolled downward spiral in the value of goods.

Many feel that covering up that threat is essential to preventing a new, massive downturn in the U.S. economy. Only by maintaining a happy face, by talking up any skimpy positive economic news and keeping up appearances, can the readily-duped American consumer be persuaded to buy, buy, buy at current prices, they argue.

Going into the coming holiday shopping season, this is especially important.

But this just mimics the process that led to the unraveling of the global monetary system in the fall of 2008, which was also predicated on the gullibility of unwitting investors and consumers, as documented in excruciating detail in the new book, “All the Devils Here: The Hidden History of the Financial Crisis” by Bethany McLean and Joe Nocera.

How many more times are we, the people, expected to fall for all this?

The behavior of the public in the world of the “new normal” is tending to make the policy makers even more nervous than the public already is, itself.

It’s no wonder that people are holding back spending and investing. Unemployment is at 10 percent, officially, and much higher when you factor in those who are working for less than they did before, working only part time, or who have given up trying to find a job (in which case they’re not included in the statistics).

Up to a fifth of the U.S. adult population, as a result, is unemployed or underemployed, and if that doesn’t put a big dent into Wall Street’s buying expectations going into the holidays, then add in continued record levels of housing foreclosures and investigations of extreme malfeasance by mortgage lending companies which could yet result in the failure of some “too big to fail” banks.

Overseas, the Chinese and others are not willing to cooperate with what the U.S. says needs to happen to stabilize the situation, and with the U.S. in the relative back seat to the Chinese now, unilateral moves by the world’s new dominant economic superpower could have a remarkably disruptive effect.

In Europe, the lack of a political will in places like Ireland to impose the levels of domestic austerity required to acquire bridging assistance will have a domino effect into the gut of the U.S. economy, as well.

Meanwhile, consumer debt institutions in the U.S. are redoubling their pressure on their U.S. customers to pay off their debts, to make sure they make those credit card and mortgage payments on time. Their mouthpieces in the media are cautioning the public about the importance of staying out of debt, and that is only their way of saying, “Pay us what you owe us before you can’t anymore.”

Housing prices are continuing to come down in most regions and discretionary spending is fading fast.

People aren’t spending not because they’re unsure about what Washington will do, as the Republicans contend, but because they don’t know if they’ll have a job next week, or if they’re going to have to subsidize their unemployed brother’s family.

So, the mere decision to put off a historic pattern of buying a new car every three years, and learning that its really OK to wait an extra three years, is having a huge impact on the wider economy.

As Krugman says so simply, how can you fear inflation if you continue to have such high unemployment? Isn’t the opposite of inflation much more likely?