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Gas below $2

The talk of deflation, a general decrease in prices, is now becoming more common. Wasn’t it just a few months back that we were worrying about inflation and its cousin stagflation? But, I think the new fears are a bit unfounded. Inflation is not simply defined as ‘rising prices’ but as ‘too many dollars chasing too few goods.’ In the case of deflation, it’s just the opposite, too little demand, and not enough cash to buy the goods offered. I think the mini-bubble we saw in gas prices rippled through the economy and added cost to everything, from food, to any goods tat contained a transportation component in their cost. Now that oil has dropped to a somewhat more reasonable level, gas following, that cost is being pulled out of all goods, thus the short term drop in both the Producer Price Index (PPI) and Consumer Price Index (CPI). Deflation? I doubt it.
Joe

  • Augustine November 24, 2008, 3:07 pm

    I’m still hooting for food prices to go down though. Food prices went up much more than fuel and lagged the fuel prices increase by over a year, so I’m not sure that fuel is the whole story behind the rise in food prices.

    What are your thoughts about the rise in food prices in particular?

    TIA

  • JOE November 25, 2008, 11:14 pm

    No, fuel was only one component of the food increases weve seen. It appears to be a combination of many factors.
    An article I referenced in May, The Global Food Crisis discussed a series of droughts causing shortages along with the diversion of food to biofuel. It also discussed the fact that the average Chinese now consumes 110 lbs of meat each year, up from 44 in 1985. One pound of beef takes 20 pounds of grain to produce, so the impact is huge.
    Lastly, theres the increasing prosperity in both India and China, which reduces the elasticity of demand. A poor nation will go to bed hungry, as they prosper, they’ll absorb the cost and pay the higher prices. (This observation from a June 16th article in Forbes)
    Joe

  • Augustine November 26, 2008, 1:35 pm

    Joe,

    I’m not convinced that greater consumption is an answer either because food prices shot up in the last year or so, whereas I assume that the increase in China and India was gradual over many years. Besides, what would it have to do with the price of milk, which is not exported, though dairies are, quadrupling and not having relented yet.

    I wonder if it’s the result of some other non-economic factor, such as speculation or mania. IMHO, an extremely underreported issue.

    Thanks.

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