The Consumer Price Index fell into negative territory last month. We are seeing the smallest 12-month gain since 1966. This indicates the cost of living is falling. It is cited in the article below as being a reaction to unemployment and foreclosures. I would include pay cuts and lack of credit, as well. Many who are still employed have seen their pay reduced in some form, or are working part time jobs when they’d like to be working full time. Loans are hard to get. Home equity is gone and HELOCs are closed down.
The fall in prices is considered a red flag indication of deflation at work. The CPI doesn’t even include the price of buying a home. It uses rental prices, which are also falling now. If it used the price of purchasing a home we’d have gone negative long ago and would see much deeper plunges in the numbers right now, of course.
Funny, this was a “surprise” to economists but the bloggers I read have been talking about it for eons. Thank you, internet!
Prices falling sounds like a good thing, but in a deflationary climate falling income outpaces those falling prices and our inability to pay escalates faster than prices around us are discounted. Destruction of wealth and falling income lead the way with prices falling in response. If it takes hold, deflation is a very difficult process to stop. We’ll just have to ride it out. Ultimately the correction is necessary and good. Like Shiva’s dance of destruction, like the winter freeze that prepares the seed for next spring’s bloom.
So now is probably a good time to pay off all your debt! And sell anything of value you don’t need.
Consumer Prices in U.S. Unexpectedly Drop, Core Rate Unchanged
By Timothy R. Homan
May 19, 2010