In looking back over 2008, there is one piece of good news -- but it's a silver lining on a black cloud. What am I talking about? In 2008, the U.S. had the lowest inflation rate since 1954 -- 0.1%. Back in 1954, prices actually fell 0.7%. The 2008 inflation report is good news in one sense, and ominous in another.
The good news is that the price of gasoline fell so much. In December gasoline lost 17.2%, the largest monthly decline in records that go back 71 years. Overall energy prices also dropped by a record 8.3% as home heating oil and natural gas showed declines.
If only it weren't for the reason that prices were falling, this news would put a smile on my face. And the reason for the fall is that the economy can only grow if consumer spending grows. And that's not growing because consumers are making less money and they can no longer borrow to make up the difference. This means that demand is dropping for just about everything -- including gasoline.
Lower demand means that producers will cut back on idle capacity. And those cutbacks mean more people will be joining the list of the 2.6 million who lost their jobs in 2008. And those newly unemployed will cut back on their spending. So despite flooding the banking system with $8 trillion and cutting interest rates to zero, inflation is practically nil.
To quote Hank Paulson, heaven help us if we need to raise interest rates to attract more money to keep pumping more government money into the economy. If that happens, we'll turn a deflationary spiral into a deflationary nose dive.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College. Portfolio published his eighth book, You Can't Order Change: Lessons From Jim McNerney's Turnaround at Boeing on December 26, 2008.
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Reader Comments (Page 1 of 1)
1-16-2009 @ 6:25PM
JeffCO said...
It's too bad there is such massive ignorance about the terms "inflation" and "deflation." What the author is expressing is "price appreciation" and "price depreciation" not inflation/deflation. Inflation/Deflation is a monetary phenomena only, meaning the supply of money is being increased/decreased. Everything done by the Fed is massively inflationary over the long term while the short and intermediate business cycle at the moment is undergoing price depreciation in certain market sectors. One look at the Fed's stats will clearly show we are not in "Deflation." Until Americans learn real economics these skewed view of the actual phenomena will continue to get play.