And They’re Scared of Deflation?

by Darwin on June 26, 2011

I couldn’t help but be skeptical when the Fed justified continued quantitative easing and low interest rates by citing potential deflationary pressures in the economy.  On one hand, yes, we do have high unemployment, so it’s tough to assume high inflation is imminent due specifically to strong wage growth, but when saying we have deflation as a problem, it depends what you measure, right?

While the CPI is showing low double digits each quarter, most Americans don’t feel that measure is representative of our “personal” rate of inflation.  Sure, maybe it costs a bit less this year to buy a flat-screen TV and other cheap toys from China and Thailand.  But what about private health insurance?  Real costs like that are through the roof year over year!  I shouldn’t complain because at least a decent portion of our family’s health insurance plan is subsidized by my employer, but even with that in mind, it took a huge toll on our overall finances this year.  Given the low raises employees are seeing nationally, naturally, our employer didn’t feel it necessary to grant large annual increases this year at all.  So, considering our premium increases and other costs, we’re actually worse-off this year than last  – crazy, huh?  The amount of money I have to save for my kids’ college tuition is up 5-7% each year.  Meantime, nationally, wages aren’t growing fast since unemployment’s high (companies don’t have to pay you more to keep you there).

So, in terms of “real” purchasing power, it seems like inflation’s quite high indeed.  Commodities are up which naturally translates into higher food, clothing and energy costs.  Meantime, there is high inflation “officially” in many of the countries we import goods from.  I was just reading that Thailand (the next low-cost China) has had an unprecedented spate of strikes due to runaway inflation and wages “only increasing” like 5-10% annually.  And that’s after China has already felt this effect.  So, when our low-cost suppliers start raising prices, it’s obvious who’s gonna pay.  But alas, the Fed keeps the easy money policy, stimulus packages and quantitative easing alive.  So, it seems inevitable that we are both experiencing real inflation now and the Fed will fess up to “official inflation” taking hold before too long.
What are you more afraid of – Deflation or Inflation?


{ 2 comments… read them below or add one }

Ken Faulkenberry June 27, 2011 at 3:11 pm

We should be concerned about both (named Biflation) inflation and deflation. Items we own are declining in value, while items we consume are increasing. I have written an article on the subject titled “Is Biflation Creating Global Stagflation” on the AAAMP Blog.


101 Centavos June 28, 2011 at 6:17 am

Don’t know about Thailand being the next China. I’ve contracted for work in both, and get better results out of Chinese suppliers. Although I have a strong liking for Thais in general, the political risk in Thailand is constant.
As for inflation being officially low, our esteemed gov’t official must be smoking some special kind of crack. Some industrial materials have seen a 100% rise in cost in the last 12 months.


Leave a Comment

Previous post:

Next post: