I'm just starting to figure out economics. In the last couple of days, I have trended the historical CPI and noticed that prior to 1955 there were periods of both inflation and deflation. In fact, the overall inflation since 1913 isn't that great.
However, since 1955 there have been no periods of deflation. This is curious to me, since statisitics will tell you that there should be periods of both even if the overall trend is toward inflation. Shouldn't there be a correction downward at some point?
Anybody know why? How? It sure doesn't seem normal.
Thanks,
Don
ThatsMe:. This is curious to me, since statisitics will tell you that there should be periods of both even if the overall trend is toward inflation.
based on what assumption, that CPI is normally distributed over the years?
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The CPI is not a measure of inflation. Rising prices, falling prices, stable prices are the results of inflation not the inflation itself. Inflation/deflation is a monetary phenomina. In other words the inflation/deflation is realated to the amount of money in an economy not the changes in prices of various things. As for the date of 1955, the real increases in the money supply happened after the recession of the early 1920s and has only accelerated recently. The Great Depression (really the Great Government Attempt to Stop Business Liquidations) had periods where bank failures and what not took money out of the economy thus increasing the value of the currency (The government and Fed had a modicum of restraint in those days fortunately) and that caused the lowering of prices.
As I understand it, the CPI is an attempt to value the dollar. So each calculated CPI figure is an estimate of the real value of the dollar. Consequently, there should be periods were the calculated values are higher or lower than the real value. When it shifts lower, we conclude there is deflation.
>>When it shifts lower, we conclude there is deflation.
the estimate or the 'real thing' ?
ThatsMe:As I understand it, the CPI is an attempt to value the dollar. So each calculated CPI figure is an estimate of the real value of the dollar. Consequently, there should be periods were the calculated values are higher or lower than the real value. When it shifts lower, we conclude there is deflation.
Inflation = Increase in the money supply
Deflation = Decrease in the money supply
A lot of the componants of CPI are increasing in price simply because more dollars are being printed which devalues it. I would imagine the dollar printing effects these CPI figures on a much greater scale because a lot of the componants are hindered more by government actions (someone correct me if I am wrong here). An example would be the housing industry and how cheap money, easy loans, and full on government support has helped keep this component of the CPI from falling (except until recenetly of course). Now, there are plenty of places in the economy where prices still come down. Take a look at the computer industry for example. Due to higher competition, lower regulation, and technology advancements, prices have consistanlty come down.
It's a strange world we live in. :)
jmorris84, hey how do you add quotes to your repsonse. I haven't figured it out yet.
ThatsMe: jmorris84, hey how do you add quotes to your repsonse. I haven't figured it out yet. Thanks,
There are two ways that you can do it. The way I do it is by copying all of the text by the user I want to quote and then typing out quote user="User Name" (including the quotation marks before and after the user name) in between brackets, then I paste the text that I want to reply to and then at the end of the quoted text, stick an /quote in brackets.
or
Follow this link: http://mises.org/Community/forums/t/18184.aspx
I haven't tried this method myself but it seems like it works for others.
jmorris84: Inflation = Increase in the money supply Deflation = Decrease in the money supply
So if I get what your saying, the Federal Reserve prints more currency, thereby diluting the buying power of the dollar. At the same time, the governments regulatory policy as well as subsidies mess with the cost of a particular commodity, which scews the numbers when you calculate the CPI. Is that right?
I found this link about the Federal Reserve. Any insight or comment? Is this information accurate?
http://en.wikipedia.org/wiki/Federal_reserve#Inflation_and_the_economy
nirgrahamUK: >>When it shifts lower, we conclude there is deflation. the estimate or the 'real thing' ?
Since the real value of the dollar can only be estimated and not know with absolute certainty, when the calucated value shifts lower we assume that the real value has too. Consqeuntly, it's like throwing darts. Sometimes, you're a little high, low, or right on.
ThatsMe: nirgrahamUK: >>When it shifts lower, we conclude there is deflation. the estimate or the 'real thing' ? Since the real value of the dollar can only be estimated and not know with absolute certainty, when the calucated value shifts lower we assume that the real value has too. Consqeuntly, it's like throwing darts. Sometimes, you're a little high, low, or right on.
ok, so you mean both... so when you say 'shifts lower', lower than what?
Another follow up question. I was asking my brother about this. He had some insights that were helpful. But he made a comment that didn't make sense to me.
He said that businesses don't like deflation. I could understand huge deflation in a short period of time; that would make it difficult to estimate the price a which you need to sell.
But wouldn't deflation in small doses help them compete in the global market place? If their COGS were lower, that would mean their price could be lower, resulting in a better competative position. Anyone have thoughts on this?