Yes, still deflation

Maybe I’m crazy, but this morning’s CPI number actually improves the odds of deflation sometime in the next year. According to the BLS, consumer prices went up 1.1% in June—just for that month. And CPI is up an astounding 5% over the past year, the highest since 1991.

However, that gain is due only to food and energy—commodities whose prices are very sensitive to demand. The rest of consumer prices only went up 2.4%. In particular, medical care was only up 4% over the past year.

As the economy slows, the demand for commodities is going to fall. The price increases for energy and food could very easily reverse themselves over the next year. And with a weakening labor market, there’s little chance of starting a wage price spiral.

When the price of energy and food starts to drop, it will pull down the CPI just as quickly as it pulled it up.

Like I said, I could be crazy.

Added: I figured that I might as well put in a plug for Chris Farrell’s book “Deflation : What Happens When Prices Fall.” (Chris is a contributing editor at BW)

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