A lot of chatter about deflationary worries have become more prevalent over the past few weeks in the media, enough so to illicit my attention. Knowing our CPI has steadily risen over the past four years, while real wages have declined or remained stagnant, I find myself at odds with processing the statement that we should have deflationary concerns.
First, what is deflation? A common understanding of the term can be summed up as the decline of overall prices on goods and services in an economy. If we examine the definition further we find it assumes this decline in prices was brought on by a decline in demand (due to large unemployment and woefully underpaid laborers), which acts as the catalyst for deflationary concerns.
Now, I begin to see what they are seeing, but as I mentioned the prices of goods and services, generally are rising, especially over the past four years. Perhaps one can say those prices are experiencing disinflation, which is the slowing of the rise of prices on goods and services as opposed to a decrease in those prices.
Then there I would agree with the pundits, disinflation has been occurring, but I'm not sure why that is such a bad thing, especially when prices increased from 1996-2004 at a completely artificial and unsustainable rate (e.g. gasoline, health care services, beef, etc'). If deflation did occur, it would increase the buying power of many Americans, leading to increased consumption, not sure why one would be concerned about such things.
I also agree with these pundits that their disinflationary and deflationary concerns stem from the Federal Reserve's meddling in our economy. In fact, if we didn't have a Federal Reserve, these disinflationary trends would correct themselves in a more organic, market-oriented way, as they did prior to the Federal Reserve's creation.
The only market to experience deflation, that I know of, is the credit markets. The price to obtain "credit" (debt), is still kind of dead in the water when compared to the usurious rates banks and financial firms were preying upon consumers with from 1982-2008; and this perhaps is the only good to come from the Federal Reserve's meddling in our supposed "free market".
That meddling by the Federal Reserve has assisted in creating weak consumer demand, maintaining low wages, leading to disinflation, but not deflation, as the general prices of goods and services have steadily risen.