Deflation: The major problem in our economy

Wade A. Barker By Wade A. Barker, 19th Apr 2012 | Follow this author | RSS Feed | Short URL http://nut.bz/h5_7_l4z/
Posted in Wikinut>Money>Economics

Our current inflation measures have contributed to over-reactions by our central banking system, the Federal Reserve.

Section 1

Our current inflation measures are inadequate. I would argue that our economy has been in a state of deflation since at least the third quarter of 2006. Inflation measures the incremental increase in the cost of the goods and services that each individual buys over a period of time. Right now, most inflation indexes exclude real or financial assets such as stocks and real estate. When I examine my monthly expenses, the housing expense is much larger than gas, food, or any other recurring expense.

When a business is looking to expand into a new area or state, they will examine the ‘cost of living’ in the area. One of the largest components of the cost of living is housing whether that be renting or purchasing. When you think of cities that have a high cost of living such as San Francisco and New York, the reason the cost of living is so high is primarily due to the cost of housing. Also for most people, their house will be their largest investment over their lifetime.

While there is no widely-accepted index that measure ‘Asset Price Inflation’, some central bankers have suggested that it would be better to aim at stabilizing a wider general price inflation measure that includes some asset prices, instead of stabilizing CPI or core inflation only. If the Federal Reserve had included housing into their inflation indexes, they most likely would have lowered interest rates more aggressively in this recent downturn. Instead, the Federal Reserve saw the price of oil getting to $140 per barrel and slowed the process down. While I did not enjoy paying $4 per gallon at the pump, I was much more concerned about the value of my house deteriorating. In the future when making decisions about the economy, I would think the housing market should be included somehow.

Tags

Deflation, Inflation, Inflation And Higher Rates, Inflation Metrics, Inflation Rate, Inflation Warning

Meet the author

author avatar Wade A. Barker
Wade Barker has over 15 years of experience in the stock market, the U.S. and world economies. He worked for a technology fund of a large mutual fund company managing $11 billion.

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