Here is their opening sentence today. "Consumer prices tumbled yet again in December, and inflation last year logged its smallest advance since the early 1950s, fanning new fears that the country may face a dangerous bout of deflation."
What fear? Fear itself perhaps? Fear of the "D" word.
Let's look at their chart first:
Looks like some pretty big drops right?"I think deflation is setting in," said Mark Zandi, chief economist at Moody's Economy.com. "Given the sliding economy, businesses are under extreme pressure to lower prices to maintain sales."
Mark please, let's have a look at some details. The only prices that are coming down are oil prices. The chart is created to fan fear when in fact their is good news in the raw numbers...
Let's have a closer look at the chart from the Department of Labor's actual report:
Transportation and Energy prices are indeed down. But the core rate of inflation (excluding food and energy has been flat.) Even during the past three months of turmoil, the core rate has been almost perfectly steady.
Meanwhile the past three months have given us lower heating bills, lower gasoline prices and a reduction in airline ticket prices.
Deflation is no where to be seen in the details. Did we notice in the midst of this barrage of negative Yahoo headlines, that in fact our cost of living is down... significantly.
Now that's Good News. Let's enjoy it while we can.
(Do you have a misleading headline or news-story that you'd like covered here? Send your suggestions to good.news.econ@gmail.com Together, we'll make it right.)
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Energy is the first component to anything you make to sell. Prices on actual 'stuff' will fall once the decreased production costs are recognized. Currently though, most companies are pocketing the descrpency, just look at Johnson n' Johnsons, United Technologies, and many others lower revenue higher profit reports to come out recently.
ReplyDeleteYou raise a great point. The result however is not deflationary as those companies will not lower their prices below their costs. On the contrary the innovative companies like IBM, J&J, INTC, and United, will use this dip in energy and jump in margin to further invest in their businesses. Have a look at the earnings calls for INTC and IBM (highlighted on this blog today.) Those management teams are preparing for a great 2009.
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