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| Home Front Economy | |
| The CPI Plunge Is a Great Thought | |
| 2009-01-17 | |
| Larry Kudlow Today's consumer price index dropped for the fifth consecutive month. This is part of the unwinding of the great oil shock that was an important, if overlooked, factor in the current economic downturn. Various talking heads have been wringing their hands over the specter of "deflation," which is a bad thing to economists. But oil at $145 a barrel added an enormous artificial bulge to the supply chain costs. The price falling to more normal levels -- perhaps in the $20-25 a barrel range -- reduces transportation and energy costs significantly. I noticed today that there is not much talk about the CPI amidst the hullabaloo of the government effectively nationalizing Citigroup and the Bank of America. Making these giant banks wards of the state is a terrible idea. It's an enormous incentive to do some big-time boodling. Personally, I belong to a credit union. If I need an actual bank, there are lots of them around here that aren't Bank of America or Citigroup. The local isn't wiped out all the way.
And while consumer prices are deflating, producer prices -- which represent wholesale costs to business -- have been deflating even faster with the plunge in energy and other commodities. Consequently, corporate profit margins are improving as costs drop faster than prices. This important development is also overlooked. | |
| Posted by:Fred |
| #10 Oil might go back up if the T-Bond sale fails and the dollar crashes. Interest rates then have to go back up... |
| Posted by: Bright Pebbles 2009-01-17 15:57 |
| #9 The drop in oil prices is better than a tax cut. 60% of the money paid for oil went out of the US economy, circulating for other economies' benefit. With the price drop, most of that money at least stays and circulates for a few turns (before going to China, Germany, etc). |
| Posted by: ed 2009-01-17 14:03 |
| #8 The recent drop in oil prices is less of an inflation/deflation thing and more of a bubble busting thing. The twist is that oil touches everything, so when that bubble burst other prices came down too. The effect is like a tax cut -- it doesn't directly create any more wealth. It just leaves more existing wealth where it belongs. If that continues, it will have a positive effect on growth. |
| Posted by: Iblis 2009-01-17 12:13 |
| #7 s/talking/be talking/ |
| Posted by: KBK 2009-01-17 11:16 |
| #6 Although the stock market has stumbled in the new year, it too will benefit from the inflation tax cut. Remember, the capital-gains tax is un-indexed for inflation. As prices moved up towards 6 percent last summer, stocks moved down big-time. Now, however, the decline of inflation is reducing the effective tax rate on real capital gains from roughly 40 percent last summer to only 15 percent through December. This is a huge tax cut on stocks and wealth-creation. While President-elect Obama appears to be willing to leave the Bush tax cuts untouched in 2009, and perhaps 2010, the falling consumer price index is slashing the cap-gains tax rate in real terms. I find this incomprehensible. What can he talking about? 40% to 15%? For most people, a 50% loss of capital is hardly compensated by that 'nice' long-term capital loss offset they've now got tucked away. |
| Posted by: KBK 2009-01-17 11:15 |
| #5 The problem that I have rarely seen addressed is the unaccountable power of the Chariman of the Federal Reserve System and the existance of the FRS itself. The media is far more interested in continuing to pump the Obama bubble. |
| Posted by: Anguper Hupomosing9418 2009-01-17 10:29 |
| #4 Where does gauging stop and deflation begin? What is a legitimate mark up and what is a outright killing? Where is it written that fundamental and essential items of existence are of the same weighted value as luxury goods? |
| Posted by: Procopius2k 2009-01-17 09:05 |
| #3 Based on this, consumers never had it better than in the 30's. Too bad there were so few of them. The problem is not so much high oil prices or low oil prices, but volatile oil prices. Volatility makes it hard for people and organizations to plan with confidence. This shortens time horizons, reduces risk taking, thus entrepreneurial activity, and ultimately profitable growth. We would have had more stability. But ultimately oil is one of many symptoms of the problem, not its cause. The real cause was the continual cascade of bubbles and bursts dues to e-z money and overextension of credit to uncreditworthy mortgagees. The problem that I have rarely seen addressed is the unaccountable power of the Chariman of the Federal Reserve System and the existance of the FRS itself. 1913 was an evil year. |
| Posted by: Nimble Spemble 2009-01-17 06:55 |
| #2 Deflation IS good news for consumers however if people start hoarding cash (and not doing transactions) waiting for prices to fall further then the whole economy seizes up. |
| Posted by: Bright Pebbles 2009-01-17 04:27 |
| #1 Of course that $350B in shiny new consumer purchasing power is partly, if not mostly, transient. Combine the coming cap-and-trade / BTU tax costs with a predicted rise in gasoline prices later this year and we'll be right back where we were soon enough. |
| Posted by: AzCat 2009-01-17 02:24 |