The Problem is Not Deflation, It’s Attempts to Prevent It
Let’s investigate the Fed’s effort to prevent price deflation.
Here’s a Tweet that caught my eye.
“We’re about to have deflation and the market hasn’t figure it out yet… when it does, the Fed is going to shit itself.” @hendry_hugh @raoulGMI
https://rvtv.io/3aWzxf4
Problem with deflation is- Why buy anything if you know it will be cheaper in the future.
“Problem with deflation is- Why buy anything if you know it will be cheaper in the future.,” responded one person.
Let’s investigate that question starting with a look at the CPI basket.
CPI Percentage Weights
Why Buy Anything Questionnaire
Q: If consumers think the price of food will drop, will they stop eating?
Q: If consumers think the price of natural gas will drop, will they stop heating their homes?
Q: If consumers think the price of gasoline will drop, will they stop driving?
Q: If consumers think the price of rent will drop, will they hold off renting until that happens?
Q: If consumers think the price of rent will rise, will they rent two apartments to take advantage?
Q: If consumers think the price of taxis will rise, will they take multiple taxi rides on advance?
Q: If people need an operation, will they hold off if they think prices might drop next month?
Q: If people need an operation, will they have two operations if they expect the price will go up?
All of the above questions represent inelastic items. Those constitute over 80% of the CPI. Let’s hone in on the elastic portion with additional Q&A.
Questions for the Fed – Elastic Items
Q: If people think the price of coats will rise will they buy a second coat they do not need?
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