Is low inflation bad?
Even if inflation (CPI less food and energy) stays steady between 1% and 2%, there really is no problem. Prices are still rising.
Paul Krugman would like to see inflation rise because that would lower real interest rates. But that is not going to happen, and he shouldn’t be expecting that it will.
Is there a danger of deflation? No… Inflation will stay steady and low. But then, is there a danger of deflation in a subsequent recession? Yes, there is a danger, but prices will bounce back. The US does not have the same demographics as Japan.
The problem in the economy is not inflation. Most Americans are just plain and simple not making enough money. So why don’t we have deflation? Business is providing goods and services at stable prices. Consumers don’t have the money to pull prices up, and prices have a strong resistance to go near zero percent inflation. Prices will remain stable.
in the most recent revision of 2nd quarter GDP, the PCE deflator was negative (ie, the addition to GDP from PCE was increased by 0.1% due to deflation)
the deflator for goods indicated an annual deflation rate of 3.3%…
i’d give you the link to the report, but BEA is offline…here’s my coverage:
I enjoyed reading the link to your post. Great synopsis of data!
I understand that you not saying we are going into deflation, you are saying that there is pressure downward on inflation.
I agree, I do not see inflation going below 1%. There are some signals that the economy will advance forward and put some upward pressure on inflation.
What I see in your data, like 1.4% increase in 3rdQ real PCE, is that the problem is income. I agree with that.
With all the push and pull between the numbers in the data, CPI inflation will stay steady between 1.5% and 2.3% on a quarterly basis going into the next year. I use quarterly to reduce the month to month fluctuations.
But your blog is one to watch, you have a great synopsis of data, and insightful commentary mixed into the data.
Edward, no, im not saying that we’re heading into a deflation, just that one quarter’s data showed a bit of deflation in personal consumption expenditures, which was caused by lower prices for goods (prices of services rose at a 1.6% annual rate)
i also dont think there’s much that the Fed can do about PCE inflation or deflation, either, if that’s what Krugman was suggesting…over time, consumers can only spend as much as they earn after taxes (allowing for fluctuations in consumer credit and the savings rate)…the Fed may be able to produce inflation in financial assets and real estate, but those arent included in the common consumer oriented measures of inflation…
What is your view on the inflation in financial assets and real estate?
What does it signify?
i dont follow equities closely, nor much of other financial markets, so i wouldnt venture to explain their movements…but i’ve opined several times that the Fed in contributing to re-inflating the housing bubble…i’ve repeatedly pointed out that houses are a depreciating asset, just like cars, and absent inflation, they should go down in price until they fall into such disrepair that they become worthless…
so rising house prices are a long running illusion; the reason houses seemed to appreciate in value started with the inflation of the 70s; because money depreciated faster than houses, houses went up in price…if inflation was 100% per year, cars would appear to go up in price every year too; you could then buy a car & drive it three years & sell it for more than you bought it for, just as people now expect they can do with their homes……
RJS as to housing you seem to be confusing depreciation and deterioration. While it is true that the typical depreciation schedule for commercial (including SFR rental) residential buildings is 40 years, in point of fact this country in both urban and rural areas is chock full of fully functioning single family residences in the 50 to 150 to even 200+ age range. And in upscale towns and neighborhoods like many in the SF Bay Area people would look at you as if your were insane if you suggested their 20s or 30s bungalow was worthless. Not least because many of those houses have been under constant repair.
It is true that certain systems in houses do both depreciate and deteriorate and this especially applies to roofs and mechanical and plumbing, all of which you could expect to have to replace/address/at least repair every 30 years or so. But you only have to drive around the older neighborhoods of almost any long established (and not impoverished) town or city to find nice examples of houses often dating to the very origins of the town.
Now to a much lesser degree this is true of automobiles, there are many cars on the road that are 50 to 100 years old. But since almost all their systems are mechanical or electrical it takes more constant maintenence than the main structure of a house. But the differences are not explainable in economic terms, it is not the case of separate asset classes, instead the differences are driven by the engineering.
There is absolutely nothing absurd with housing appreciating in value, at least as long as that value maintains SOME relation to equivalent rent. Because people need someplace to sleep and will in almost all places and times devote some percentage of their income/labor to provide themselves one. And are not likely to concern themselves much with the fact that that LA bungalow was built new for $6000 in 1921.
I am starting over as a freshman accounting student and one of the first things we learned is that even for equipment that does in fact deteriorate in use that there can and typically are substantial differences between ‘fully depreciated’ and ‘no longer having economic use’. Once again small mechanical and industrial operations nationwide still have equipment in use many years after their book value was reduced to their salvage value.
While it is true that in some cases (but not all) that ‘houses are a depreciating asset’, this is typically more a matter of concern to the tax man than the appraiser who is applying valuation at ‘highest and best use’. A use value that has nothing to do with any fixed depreciation schedule or theoretical building life.
ok, bruce, i understand the difference between depreciation and deterioration and perhaps i conflated them in trying to make a quick & dirty comment..
i didn’t mean to suggest that car and homes had similar lifespans nor that the effects of age on both was similar; but just as one can keep a car running longer than it would otherwise by replacing deteriorating components, one keeps a house functional as a shelter longer by remodeling, repairing & replacing it’s components..
a 200 year old house may be a functional as a 25 year old car, but neither would be functional if they hadnt benefited from those repairs and and replacements; i’d venture that there arent many 200 year old houses with the original plumbing and heating components, and certainly none had electricity at the time they were built…since they’ve all been upgraded in that manner, they’re partially of new construction…
i’m living in an 1890s farmhouse that was once Amish owned…i ‘ve added most of the electric circuits, put two furnaces in it since i’ve been here, and i’m in the process of replacing the roofing for a second time…yet i have my doubts that this old house will remain standing 100 years from now…
“i’ve repeatedly pointed out that houses are a depreciating asset, just like cars, and absent inflation, they should go down in price until they fall into such disrepair that they become worthless”
Hmm. “Just like cars”. “should go down in price” “fall into such disrepair”
Not a lot there to acknowledge that houses are subject to preventative maintenence/repairs/updated systems in ways that preserve (or as with your mention of electrification enhance) their highest and best use even where that use value moves up in general accord with overall price inflation (absent actual bubbles).
As to whether your house will be standing in 100 years, well there are similarly constructed houses in Britain still in use hundreds of years after original construction. And on occasion still in forms recognizable to their original builders/owners. And given the likely quality of the timber used to build that house there is little reason a priori to assume it will collapse like the proverbial One Horse Shay.
So while I wouldn’t use ‘quick and dirty’ I am inclined towards ‘sloppy’ in your equation of two things only in a subseqent comment acknowledging all the things that make them different.
Because we are getting a little close to “My Grandmother would be a Bus. If she had Wheels.” Well sorry there are errors on both sides of that. We can agree that houses shouldn’t be expected to appreciate at rates well in excess of either the rate of general inflation or its major component of equivalent rent just because. Which is not to say they shouldn’t appreciate at all. And your original argument got perilously close to suggesting that ALL such appreciation was the result of some external distortion, in this case by monetary authorities.
‘Rigor’ – it is not just for the ‘mortis’.
i’ll admit to sloppiness, bruce, i wasnt intending a thesis, just attempting to answer a question in the context of our previous exchange on inflation being limited by incomes…”just like cars” was a poorly chosen tangent …
so what my point comes down to is that if there is no inflation in disposable personal income, then there is no sustainable buying power to lift home prices, and what the Fed is doing with buying MBSs is reinflating the housing price bubble by driving interest rates down such that higher priced homes can be bought with smaller monthly payments; however whenever such time as they pull back or interest rates rise, the house price rise will reverse itself, unless disposable personal incomes are inflated enough by then to pick up the slack…
i understand why the Fed’s doing this, there’s still a ton of REO that the banks have to unload, and it even helps the little guys who are still underwater…but when it unwinds, it’s more than likely to come back & bite us again…