Friday, January 16, 2009

Consumer Price Index (December)

BLS details:

The CPI-U decreased 0.7 percent in December, the third consecutive decline. The index is now only 0.1 percent higher than in December 2007. Declining energy prices, particularly for gasoline, again drove most of the decline. The energy index declined 8.3 percent in December. Within energy, the gasoline index fell 17.2 percent and accounted for almost 90 percent of the decrease in the all items index. The index for household energy declined 0.7 percent. Excluding energy, the index was virtually unchanged for the third straight month. The food index declined 0.1 percent in December, the first decrease since April 2006, as many meat, dairy, fruit, and vegetable indexes decreased.

By Expenditure


  1. This really worries me. Excluding energy (and factors directly related to energy) which was in a huge commodities bubble, I just don't see any deflationary problems.

    And certainly none that would warrant the incredibly unprecedented moves by the Fed to try to fight deflation.

  2. i think you have to look at how far things have come (about 6 months ago EVERYONE was worried about inflation), as well as expectations going forward.

    as we've seen on this blog, inventories are rising (deflationary), people are losing jobs (deflationary), savings are increasing (deflationary), and commodities as you mention are crashing (deflationary).

  3. I'll agree that things are generally deflationary, but it doesn't seem like a problem to be honest. At least not such a problem as to require excessive government intervention.

    How much of that deflation is due to deflationary expectations where people are sitting on the sidelines with cash not buying because they expect prices to keep plummeting (ie damaging), and how much of it is due to consumers and businesses retrenching because they need to relieve their debt situation (ie healthy).

  4. the interesting thing (in my opinion) is that on a case by case basis, it is very healthy to "retrench" and build up savings, both at an individual, state, federal, and corporate level. the problem lies when all try to do it at the same time.

    i've read some interesting literature on this called "the paradox of thrift". the problem is that 70% of the U.S. GDP is consumption, like it or not. if everyone stops consuming at the same time, the only option is to force consumption and the only way to do that is through government spending.

    i'll agree that the current situation is frighterning because if things don't work perfectly (and they never do) it can/will have serious implications.

    thanks for the posts!

  5. Like you said, things never work out perfectly in an imperfect world.

    In a Keynesian utopia, the government would extend during period of consumer retrenchment, and vice versa. In other words, the Gov't would run a deficit during downturns to soften them and run a surplus during expansions.

    What I think we find ourselves in, though, is a situation where all sectors need to retrench because of their reliance on debt for growth for too long.

    At this point the government effort seems like trying to find some bubble to reinflate- they want to force people back into unsustainable consumption pattern, while the government itself is also in an unsustainable fiscal trajectory.

    I'd prefer a more pronounced bust cycle over what seems to me to be limit testing on the currency.

  6. The housing section of the CPI is a load of crap. They use owner equivalent rent, which completely missed the housing bubble. That means inflation was massively understated for the past few years, and is being overstated now.

  7. Enginerd-

    You might want to take a look at an alternative calculation I've created that shows just what you've detailed:

    Case Shiller Price Index