	Generational Dynamics
	Forecasting America's Destiny ... and the World's

\| HOME \| WEB LOG \| COUNTRY WIKI \| COMMENT \| FORUM \| DOWNLOADS \| ABOUT \|

Generational Dynamics Web Log for 17-Jul-04
This week's financial data points to trend back toward deflation.

Web Log - July, 2004

This week's financial data points to trend back toward deflation.

Several inflationary indicators are down for June -- import and export prices, producer prices and consumer prices were all lower than expected.

In a world where the Fed funds rate is 1.25%, we should be seeing signs of inflation everywhere. The fact that the inflation rate continues to be tepid is seen as very good news by many analysts, but there's more to the story.

The CPI (consumer price index), which measures prices paid by consumers, rose only 0.3% last month, half the rate recorded in May. The core index, which excludes volatile food and energy prices, rose a tiny 0.1%, the smallest increase this year.

The PPI (producer price index), which measures prices by manufacturers and other producers for raw materials, actually fell 0.3%, while the core rate rose only 0.2% in June,

Import and export prices were also lower than expected, indicating that the moderating inflation trend is international.

Inflation had been increasing more than expected during the first half of the 2004. This was attributed to the low Fed rate (1.00%), and to the demands of China's superheated economy. Now, with the Fed rate 0.25% higher, and with the Chinese government cracking down on bad debt in its own banking system, inflation seems to be moderating again.

Consumer price index (CPI) from 1870 to present, with an exponential growth trend line. The CPI is 185 in 2003, and 2010 has a trend value of 129.

Consumer price index (CPI) from 1870 to present, with an exponential growth trend line. The CPI is 185 in 2003, and 2010 has a trend value of 129.

Although you can't tell much from a single month's figures, the moderating inflationary trend is consistent with the Generational Dynamics prediction that we're entering a deflationary period.

This prediction is largely based on the adjacent graph, which shows the long term CPI values with an exponential growth trend line. This graph indicates that consumer prices should decline 30% or more in the next few years.

Why would prices decline so much?

The proposed explanation that I gave in my book is called the "crusty old bureaucracy" theory. According to this, there's a generational cycle in businesses, where bureaucracy sets in, and the products become gradually obsolete, and that this happens on a national basis. In the extreme, once enough businesses are producing obsolete products, inflation can't increase because no one will want the products at any price. The only way to fix the problem is through massive business bankruptcies and a new set of businesses.

In the current economy, one of the most visible examples is music CDs (compact disks). There's a huge chunk of business associated with manufacturing, distributing and selling CDs. However, CDs are becoming increasingly obsolete, because people want their music on their computer, and don't want CDs around cluttering up their homes. In other words, people don't want CDs at any price. CDs is one example, but you can easily think of many more examples in other domains where computerization are making products obsolete, or at least way overpriced.

The inflation rate is very mysterious. It's supposed to be controlled by the Fed funds rate, but it's not clear how much control the Fed actually has. The Fed can't make people want to buy products at high prices if the products are obsolete or unwanted, and that's what could be going on right now. If the Fed floods the economy with money, then it can push up the inflation rate, but only at the cost of making money more and more worthless. (17-Jul-04) Permanent Link
Receive daily World View columns by e-mail
Donate to Generational Dynamics via PayPal

Web Log Pages

Current Web Log

Generational Dynamics Web Log for 17-Jul-04 This week's financial data points to trend back toward deflation.

Web Log Pages

Generational Dynamics Web Log for 17-Jul-04
This week's financial data points to trend back toward deflation.