The Flinchum File
Thoughtful Economic Analysis and Existential Opinions

Where’s the beef?

08/13/2010

No question, deflation is a much worse problem than inflation. Once people think they can buy things cheaper if they wait, then they stop spending now.

At one time, economists believed deflation could easily be eliminated by doing the things that cause inflation, i.e., increasing the money supply and increasing deficit spending. Ben Bernanke was one of them.

We’ve since learned that increasing the money supply doesn’t work if banks won’t lend and people won’t spend. We also learned deficit spending is much more difficult when the national debt was not already at astronomical levels. (It also doesn’t help when politicians behave like selfish, spoiled children.)

Today’s good news is that the latest inflation data doesn’t show any deflation. The core CPI (consumer price index without highly volatile food and energy) was up 1.1% over last year. Of course, this is below the Fed’s goal of 2%, which means it still bears watching, rather than worrying.

Long term, I continue to believe the government will over-shoot and creat inflation. When that happens, there will be much gnashing of teeth, but we should be grateful it is not deflation!

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