Deflation Watch (August): Price Level Trends Relative to Past Debt Crises

This post updates the charts from Price Deflation Today versus the Great Depression and Post-1990 Japan — Comparative Charts with the data for August, and adds a series of charts depicting factors contributing to current deflationary pressures. Commentary will be minimal unless there is something noteworthy — the prior post includes lengthier observations on US Great Depression and Japan post-1990 trends that may still be relevant. My current plan is to update this post each month after CPI data is released as long as the comparisons remain interesting. (Unfortunately while I wrote most of this post last week I didn't have time to finish it then.)

As noted previously, "deflation" is often discussed in broader terms than simply price level:

• Contraction of money and credit (broad money supply)
• Deflation in asset prices
• Deflation in a representative "basket" of consumer and producer prices
• Deflation in wages

The various measures are often somewhat correlated but they only track to each other loosely. In the Great Depression prices fell faster than wages, yet wages (along with asset prices) still fell enough to propagate the adverse feedback loop of debt deflation in which income falls but debt obligations remain at the same nominal level, increasing the burden of the debt. Deflation in asset prices (triggered by the bursting of debt-financed asset bubbles) generally precedes the other deflationary trends.

CPI-U 12 Month Changes, 1999 to Present (US) (source)

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BLS Summary Comments:

"On a seasonally adjusted basis, the Consumer Price Index for all Urban Consumers (CPI-U) rose 0.4 percent in August, the Bureau of Labor Statistics reported today. The index has decreased 1.5 percent over the last 12 months on a not seasonally adjusted basis.

The 0.4 percent seasonally adjusted increase in the CPI-U was driven by a 9.1 percent rise in the gasoline index. This increase accounted for almost the entire advance in the energy index and over 80 percent of the overall increase. Despite the August increase, the gasoline index has fallen 30.0 percent over the last 12 months.

The indexes for food and for all items less food and energy both posted slight increases in August. The food index rose 0.1 percent following a 0.3 percent decline in July. The food at home index, which fell 0.5 percent in July, was unchanged in August. Of the six major grocery store food group indexes, three rose in August and three declined. The index for all items less food and energy also rose 0.1 percent in August, the second consecutive such increase. Increases in the indexes for used cars and trucks, medical care, public transportation and lodging away from home offset a decline in the new vehicle index. The index for all items less food and energy increased 1.4 percent over the last 12 months, the smallest 12-month increase in the index since February 2004."

Consumer Price Index Trends: Great Depression versus Today through August 2009 (US)

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Components of US Consumer Price Index (May 1927 - Dec 1937)

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Components of US Consumer Price Index (Jan 2006 - Aug 2009)

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Calculated Risk noted for this report the strange trend in BLS rent measurements:

"The BLS measure for rent increased slightly (rounded to flat). And owners' equivalent rent (OER), the largest component of CPI, increased slightly even though rents have been falling in most areas."

Price Index Changes: Great Depression CPI versus Current PPI through August 2009 (US)

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Consumer Price Index Trends: 1990s Japan versus US Today (through Aug 2009) and US Great Depression

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CPI in Japan (Jan 1980 - Jul 2009)

The peak of Japan's CPI occurred in October 1998, almost eight years after the stock market peaked, and Japan's notorious mild deflation has been in effect since then:

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Factors Contributing to Deflation

This is a partial selection of measurable forces that contribute toward price deflation, though the core cause is the bursting of debt-financed asset price bubbles. Not all of these measures are in an outright deflationary trend, but most are suggesting at least disinflation. This data is US-specific, but US price levels will also be affected by global trends in the months and years ahead, for example with respect to whether China and other emerging economies falter meaningfully in their growth.

Capacity Utilization

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Inventory to Sales Ratio

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Gross Domestic Purchases

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Total Consumer Credit

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Total Bank Credit

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Total Borrowing (All Debt Markets)

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(source)

Broad Money Supply

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Disposable Personal Income

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Employment Cost Index

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(source)

Unemployment

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(source)

Household Debt Service

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Household Financial Obligations

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Household Wealth

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Source: Calculated Risk

Personal Savings Rate

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