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What is so bad about Deflation?
By Tim McMahon The average annual inflation rate dropped again this month. At a monthly rate of -1.01% October's drop was touted as "the largest monthly drop on a seasonally adjusted basis since 1947 when the Bureau of Labor Statistics first started tracking seasonal adjustments" and it brought the annual inflation rate off its highs and down to a more reasonable 3.66%. November's monthly rate was almost twice as large at but it was hardly mentioned in the news. This month the annual inflation rate has dropped down virtually zero-- 0.09% with a monthly drop slightly larger than the one two months ago. Just a few months ago the annual inflation rate was 5.6% and now it is … [Read more...]
Deflation or Hyperinflation?
By Tim McMahon, Editor The monthly inflation rate dropped like a rock for the second month in a row. Journalists touted last month's drop as "the largest monthly drop on a seasonally adjusted basis since 1947 when the Bureau of Labor Statistics first started tracking seasonal adjustments". What are they going to say this month when it is almost twice as large? Largest drop since last month? This is real live deflation on a monthly basis (although not on an annual basis... yet). Basically, deflation is falling prices (or more accurately a decrease in the money supply that results in falling prices) while disinflation is a slowing of the rate of increase in prices. Are we in a … [Read more...]
Stagflation – What is it?
What is Stagflation? The simple definition of Stagflation is a "stagnant economy coupled with price inflation". Thus the term Stagflation... it has nothing to do with Deer. In other words, in stagflation prices are going up while the economy is going down. The word was coined during the inflationary period of the 1970's. Under normal conditions one would expect inflation to heat up the economy i.e. increase buying demand. That is one reason the FED generally increases interest rates during periods of higher inflation. This helps to cool the economy and prevent inflation from spiraling out of control. Of course ,if you have read other articles on this site, you will know that … [Read more...]
Disinflation – What is it?
Definition of Disinflation By Tim McMahon To fully understand disinflation we need to first understand inflation. The reasons this is trickier than it first appears is because the word inflation is actually used in two different contexts. The most common usage of the word inflation means rising prices. Commonly "consumer prices" so when you go to the gas station or the grocery store and the things you buy cost more than last month (or when it is really bad even more than last week) this is more precisely defined as "price inflation". The second meaning of the word inflation is actually the original meaning. And that is an increase in the money supply that causes "price … [Read more...]
Will the $800 Billion Bailout Cause Massive Inflation?
Last month I said that the simulated M3 measure of the money supply was indicating that deflation was in the works. See M3 is Back and Predicting Deflation. So how will a massive injection of almost $1 Trillion dollars affect the money supply? If you have read any of the articles on inflation on this site you will realize that the primary cause of price inflation is monetary inflation. In other words, if the government cranks up the printing presses the price of almost everything goes up. For more information see What is Inflation? and Inflation Cause and Effects. So you would think that it is only obvious that a massive injection of money like the recent $800 Billion bailout … [Read more...]
Why would Gold fall during an Investment Crisis?
Editor's Note-- In the article Is Gold really a good Inflation Hedge? I said, Gold is actually a "crisis hedge." So it should be performing extremely well with all the uncertainty in the markets right now. In this article Andrew Gordon explains how gold is currently in limited supply and demand is booming due to the crisis and what is currently affecting the price. -- Tim McMahon, editor Has Gold Lost its Investment Luster? By Andrew Gordon Gold dropped from $915 to $859 on Friday [October 10, 2008]. That’s not supposed to happen while the market is crashing. What’s going on? … [Read more...]
Inflation and Recession Chart
How does Inflation and recession correlate? Current Commentary Does high inflation correspond with a recession? Or does high inflation precede a recession? This chart shows the historical average Annual Inflation rate (red line) compared to the time periods where the country was in recession (blue shaded areas). Since 1914 there have been eight recessions. Three lasted for a single year, (in 1953, 1957 and again in 1990). The longest recession was actually the "Great Depression" which lasted ten years from 1929 to 1939. … [Read more...]
Inflation vs Consumer Price Index – Do you know the difference?
Many people are confused by the difference between Inflation and the Consumer Price Index. The Consumer Price Index is as its name implies an index, or “a number used to measure change”. The Consumer Price Index (CPI-U) The government chose an arbitrary date to be the base year and set that equal to 100. Currently that date is 1984. (Or more accurately the average of the years 1982-1984) previously the base year was 1967 (they change the base year every once in a while so you don't notice that there has been over 2000% inflation since the start). See Cumulative Inflation Since 1913. Every month the Bureau of Labor Statistics (BLS) surveys prices around the country for a basket of … [Read more...]
What Causes Inflation?
Inflation Cause and Effect I often receive letters from students, that demonstrate a fuzzy understanding of inflation and its causes. Unfortunately, I often get the same type letters from teachers and business people too! It seems that people often confuse the cause of inflation with the effect of inflation and unfortunately the dictionary isn't much help. As you can see in my article What is the Real Definition of Inflation? the modern definition of inflation is "A persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money..." In other words according to this definition inflation is things getting more expensive. But that is … [Read more...]
