So now we have deflation.
It seems the consumer price index dropped one whole percent last month, the most in one month since NewMexiKen was a toddler.
Now anybody that drives a car or truck knows that a big part of that — indeed most of it — was the drop in fuel prices. They’re half what they were four months ago — and still going down.
But even when food and fuel — the most volatile costs — are factored out, the index still dropped one-tenth of a percent and there is no reason to think it won’t drop again in November.
Great, prices are lower. Hip hip hooray.
Except.
Say they continue to drop so that a year from Social Security recipients get a cost-of-living decrease instead of that annual increase for inflation they’ve come to expect. Say your bosses decided to lower your wages because things cost less and they aren’t making as much money either.
Will your car loan get lower? Will your mortgage go down? Will the property tax assessors keep up with the curve? Will health care costs go down? Will the things you bought last year cost any less on your credit card balance? Not likely.
And there aren’t many remedies for deflation like there are for inflation. Even if the Fed decreases interest to stimulate investment, who is going to invest in a new factory when demand is going down?
But what do I know.
Don’t worry, oil prices will go back up and save the day.
The other scary thing is that we are perilously close to sitting in a liquidity trap. The only know solution for that is to push real interest rates to at or lower than inflation. That’s hard to do, once inflation goes below zero, since you have to be pretty creative to achieve negative interest rates on loans.
Welcome to Japan at the start of its lost decade.