Price indices - now there's a rum thing. Many of the componenets that are falling in price are because of excess manufacturing capacity. Of course their prices drop - too much unwanted and unnecessary goods and services to clear at whatever price it takes.

We need to look at a core index of necessary items - food, clothing, non-alcoholic beverages, and home improvement items. This is what a family actually needs to subsist. I exclude fuel, since that is a direct commodity driven mostly by market speculation, as are other commodity-tied products.

In the UK (where I live) such an index is rising at over 5% annually, compared with a retail price index of -1.6%. When clothing bottoms out, we will head towards +10% pretty quickly.

The frightening thing is that central banks do not make this distinction, nor even understand it. If they did, they would not be so ready to quantitatively ease.

Alasdair Macleod
 

Dr. Murphy,
I enjoy your blog and columns at Mises.

I follow your weekly take after the Federal Reserve's H1 to H6 releases. Did you notice that on yesterday's report, M2 NSA is sharply up again, up more than 1% from last week while M1 NSA went down.

Something wacky is going on at the Fed or maybe as someone pointed out in another blog, they are misstating M1 because of the sweep accounts.

On the deflation argument and gold, here's my thought, maybe you could give me your feedback.

Temporary price deflation will ultimately result in inflation and higher gold prices. Bill Bonner has a similar take but this is how my mind thinks the mechanism will be.

Price deflation -> if Bernanke doesn't fire up the presses -> loan defaults and bank failures -> FDIC making insured depositors whole (I'm assuming they'll use the $500 billion credit line from the Treasury and if that's exhausted, the FED will back them up) -> this is inflationary -> depositors with over 250K move assets out of banks for safe keeping but where -> only gold and silver

This is the course I envision if the FED didn't immediately intervene and print a bunch of money.

Ultimately, I think we will see inflation via the banks lending to the government rather than to individuals and inflation via FED credit rather than M2 as banks will begin failing en masse.

Another question for you? I looked at the FED's quarterly Z1 report.

The total outstanding debt (households + businesses + state govt + federal govt + financial institutions) in the US is about $51 trillion as of 1Q 2009.

If a majority of that debt is credit based, why isn't it showing up on money supply. Why are M2 and M3 way less than $51 trillion? One person's debt is another person's checking or savings or time deposit, right? If not, where did the money created for the loan disappear?

Much obliged if you can shed light on my questions. Thanks.

Troy
 

Support for your tight-money views in an unexpected place:
From a practical point of view, the last thing households facing heavy debt servicing loads with falling wage and salary incomes need are rising consumer prices that drain their already reduced discretionary income. Households need higher money incomes, not higher consumer prices, expected or actual, to exit their current difficulties. Real interest rates are diversion from the real problem at hand in a balance sheet recession, which is how to get the economy to a point where money income levels can service most private debts.
Robert Parenteau at Economics Perspectives from Kansas City
 

Remember -- the core cpi has no food or energy, which let NYSE floor trader Art Cashin to say that it only applies to anorexic pedestrians. I don't think the BLS is lying; they are just following bureaucratic procedures. They leave plenty of breadcrumbs to see where they have gone and to pierce the veil of governmentese obfuscation. There was a study from the Philly Fed showing that the core CPI was basically useless.
http://bigpicture.typepad.com/comments/2008/05/core-measures-o.html
http://www.philadelphiafed.org/files/wps/2008/wp08-9.pdf

The bigger liars are the ones who use the CPI data as an excuse for setting prices, like the US Postal Service. They used last year's "average" CPI of +3.8% to raise postal prices, even though by the end of December the Y/Y CPI was +0.1%.

The Y/Y comparisons this year will be distorted by last year's oil bubble, which makes comparing things to December's index all the more important until we can use the Y/Y figure again.
 

Thanks for the comments everyone. I'm actually not an expert on the different aggregate measures and such, so I can't explain a lot of the quirks you guys are mentioning. As far as M2, this graph shows that yes it bounced up last week, but I don't think it was particularly unusual. (And I don't know why M1 would go down at the same time. I can dream up theoretical scenarios, but I don't know in practice what would be driving that.)
 

A defense of the seasonal adjustment applied to unemployment is here.