Consumer Deflation, The Risks Are Real

The December Consumer Price Index, or CPI measuring consumer-level inflation, is showing that the risks to deflation are real.  Low prices are good.  Low prices that go lower can generate a whole host of problems.

The Labor Department reported that the nominal headline CPI was -0.7%in December, which is not as low as November’s -1.7%.  Consensusestimates were roughly -0.8%.  The core CPI reading that removesfood and energy (and arguably anything else volatile that you need) was unchanged.  Consensus on the core rate was +0.1%.

Interestingly enough, energy inflation fell again with a -8.3% readingin December.  That follows a November reading of -17%.  If we wouldhave predicted this just last summer you would have thought we weretalking upside-down.

The old argument that you need roughly 1% price hikes per year isshowing that deflation "could" be a real concern.  But after what wesaw in food, energy, healthcare, transport, utilities, and more overthe last couple of years, it is going to be hard to find too manyconsumers who are upset by today’s data.

There is a flip-side to deflationary threats that could come into the play over the coming months.  At some point, Uncle Sam might have to unwind that zero-interest rate target.  And it unfortunately won’t matter if the economy has shown any signs of recovery or not.

Jon C. Ogg
January 16, 2009