Friday, January 14, 2011


I was thinking the word "deflation" seems to have slipped in status in the economic blogosphere lately.  From being in every other blog post, suddenly it seems to have slipped back into the trees with the recent influx of slightly better economics news.

Intrigued, I went and updated the graph above, which shows the monthly changes in the CPI ex food and energy. As you can see, the last two data points (Nov and Dec 2010) show a bit of an uptick.  Possibly one could attribute this to the Fed's QE2 program.  So this presumably explains why people stopped talking about it.

However, although actual deflation has not occurred yet, it certainly seems premature to declare the end of the trend based on that uptick - it's well within the existing range of the noise around the overall deflationary trend since the onset of the great recession in December 2007.

So, on the one hand, we have oil prices clearing their throats as though thinking about attempting a new run at a peak, and we have food commodities higher than any time in the last thirty years.  And yet, we have prices of finished goods very weak.

It seems like the theme is the the world has not quite enough resources to run society as currently configured, but overcapacity in the ability to turn resources into finished goods (relative to subdued final demand, anyway).  Hence we have inflation in commodities, but deflation in finished goods.

We need a new word to describe this state of affairs.  My proposal is "misflation".


Stuki said...

I believe you are right on the money. Not enough “commodity production” capacity, partly due to purely natural constraints, and partly due to investment t having gone elsewhere for a good while. And overcapacity to produce higher order goods.

Now, overcapacity is generally a self-correcting phenomenon. Prices decline, profits drop, plants fail, and that’s that. But now, this process is being fought tooth and nail, under guise of stimulus. Cheap credit, artificial end user demand stimulation etc., etc. all contribute to prolonging the clearing out of intermediate and final goods productive capacity.

Now, from a sustainability perspective, this is doubly bad. Firstly, resources, including commodities, produce less and less “well being”, the more is being used of them. Hence, the commodities being used by artificially kept alive higher order producers, are largely “wasted” in an economic sense. Not really the wisest use of stuff that are scarce and getting scarcer.

Secondly, overcapacity upstream creates artificial demand signals to commodity producers, leading them to increase investment in order to be able to extract more to keep up with this demand. Again, not exactly what one would like to see from a sustainability perspective.

On a very fundamental level, assuming one believes the world is currently living beyond its natural resource means; bailing out, stimulating, on the cheap financing and by other means keeping those doing that living from being forced to adjust, is not exactly productive use of resources.

KLR said...

"Inflationform." Portmanteaur generates your mashed neologisms, or "mashogisms," at the click of a mouse.

This guy has much the same thesis: Inflation, here is thy sting. Found his blog while searching for inflation charts - looks like solid stuff. Works in what's going on in emerging markets, too.

Anonymous said...

Another possibility is Malflation or even a mouthful like Malthflation.

My spouse & I recently spent a day in Colonial Williamsburg and by far the highlight was discussing the economics of the American colonies circa 1760 with folks there that really keep abreast of that sort of research.

A serious grievance for the colonists was the flood of cheap goods from Britain. Local shoemakers had trouble competing with cheap imports. Wages were so low in Britain that shoes and other goods like clothing could be sold quite profitably in the US -- a high wage country even then.

Not really a problem in the US, but the poor of the world are seeing a fall in real wages.

Mr. Sunshine said...

It's just deflation. There are still some $600 trillion in worthless "assets" called derivatives on the world's books. Not that they're marked to market - yet. Even The Great Bernank can't print his way out of this.

Stuart Staniford said...

Mr Sunshine:

Here's a link to farm prices in the great depression, the classic instance of deflation in the US. You'll see that they fell sharply from 1929 to 1933, and then started to recover very slowly.

So there was nothing akin to the present day situation where food prices are making new highs while general prices of most goods were still lagging.