Expert Commentary

The Core of the Deflation Issue

The big news this week was that U.S. consumer prices increased the most in 46 years. They also declined the most on record. Say what?

This week's Consumer Price Index data release in the U.S. showed that grocery prices rose at the fastest pace in April for 46 years. It also showed that so-called core-CPI, which excludes volatile items such as food and energy, declined the most since records began in 1957. Cue many people scratching their heads. Is it inflation or deflation? Truth is, it's neither.

One of the most extraordinary popular delusions of modern times is that rising and falling prices constitute inflation and deflation. They don't. Consumer and producer prices rise and fall for many different reasons such as shortages, gluts, the weather, fashion, et al, to name but a few. However, society has become conditioned to categorizing rising consumer prices as inflation and falling prices as deflation. Central banks and governments have pushed the notion that declining consumer prices are a very bad thing, perhaps to further an agenda of perennial monetary and fiscal stimulus, increasing the size of the state in doing so. In reality, there have been many periods in history where quality economic growth has been accompanied by declining prices, such as in America between 1865 and 1896.

Inflation and deflation are, correctly, the expansion and contraction of money and credit in an economy. Consumer and producer prices sometimes rise and fall in conjunction with inflation and deflation, but sometimes not. Witness subdued consumer prices during the past twenty years of explosive credit growth. However, in a deflationary collapse, where an intensely negative social mood leads to a contraction in debt and increased saving, consumer prices often decline at the same time. Therefore, the largest ever decline in core-CPI is a signal that the Great Deflation (of debt) is very probably underway.

200514 - MG