Baker Deflates Deflation-Panic Bubble
by Dollars and Sense
There's a lot of talk in the business press about deflation and why we should be worried about it ("like trying to catch a falling knife" is the preferred metaphor).
Dean Baker takes issue with much of what's being written in a recent post on
Beat the Press.Okay, so let's parse this one. If prices are falling, why should we buy items today when we can get them for a lower price next month? That's a real good question.
Has anyone bought a computer in the last two decades? I have run across a few people who have. According to the Commerce Department, computer prices have been falling at the rate of more than 30 percent a year over most of the last two decades. If people felt that it made more sense to wait for prices to drop, we should expect the computer market to have been very weak. That isn't quite consistent with the explosion in computer sales over this period.
But, returning to the other items that might fall in price, if we turn to Japan, which supposedly suffered from deflation for a decade following the collapse of its bubbles, the rate of deflation was typically less than 1 percent a year. (Prices did rise in some years during this decade.)
This means that for a typical item in a typical year, the price would be falling at a rate of less than 0.1 percent a month. That means the pair of pants that i could buy today for $30 will cost just $29.97 cents next month. If I put off buying for two months, then I would only have to pay $29.94. You could easily understand how this would discourage consumption. Of course, the actual rate of deflation was slower in most years.
Baker acknowledges that housing prices are in a serious downward slide, and that this impacts consumer spending, saving, and a myriad of other related industries. But he argues that the housing market is a separate matter, and isn't even factored into the inflation indexes.
Labels: Dean Baker, deflation, housing bubble, Inflation
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11/23/2008 04:21:00 PM