In the next 60-90 days, we will know whether or not we have started the first full-fledged deflationary wage-price spiral in over 70 years. If that happens, it will make the entire crisis up until now feel like a walk in the park.
This morning the BLS reported that Consumer prices in December fell ( - 1.0 %) on a non - seasonally adjusted basis. Inflation for the entire year 2008 was +0.1%! (meaning I have officially won my bet wtih Bonddad). In the last 5 months, prices have fallen ( - 4.4 %), or at an annual rate of ( - 11.0%)!
Yesterday, the Producer Price Index showed the first annual decline since 1950. In the last 5 months of the year, producer prices fell (-8.2%), the biggest collapse since the Great Depression. The day before that, import prices fell the most in its 26 year history.
This is the worst deflation since the Great Depression. To make matters worse, in addition to losing nearly 2 milliion jobs in the last 4 months, we may be on the cusp of a wage-price deflationary spiral as there are increasing reports of companies imposing wage cuts on their workers.
A version of this diary is cross-posted at The Economic Populist
After surging at an annual rate of nearly 10% in the first part of 2008, since the deflationary tsunami hit in July, prices have declined at an annual rate of 11%! Here is how our Deflationary Recession compares with others from the past 100 years, as of year end 2008:
Recession Time Period | -1.5% Deflation | Largest Change |
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| | |
1/13 - 12/14 | 2 - 4/14 | (-3.0%) |
8/18 - 3/19 | n/a (inflationary) | +23.7% |
1/20 - 7/21 | 8/20 - 9/22 | (-15.8%) |
5/23 - 7/24 | 4/24 | (-1.8%) |
10/26 - 11/27 | 1 - 5, 8/27 | (-3.4%) |
n/a | 6/28 | (-2.8%) |
8/29 - 3/33 | 4/29, 3/30 - 8/33 | (-10.7%) |
5/37 - 6/38 | 1 - 12/38 | (-3.4%) |
|
2/45 - 10/45 | n/a (inflationary) | +2.8% |
1/49 - 10/49 | 1/49 - 1/50 | (-3.2%) |
7/53 - 5/54 | n/a | (-.8%) |
12/07 - ???? | 10/08 - ???? | (- 4.4 %) |
There have only been two occasions in the past 100 years when there was a deeper deflationary spiral: the post-WW1 recession of 1920-1, and the Great Depression. [Update: The ( - 4.4%) decline in consumer prices in only 5 months comes close to matching the ~ ( - 5.0%) declines over a similar period in 1931-32, which was in the depths of the Great Depression. ]
Additionally, contrary to the prediction of many pundits, food price inflation also continues to abate, albeit slightly at ( - 0.1%) in December. Update 4 A lot of commenters have pointed out that your'e still seeing a lot of inflation at the grocery market. That's correct, annual food inflation for 2008 was almost 6%. But what the graph below shows:
is that in the last couple of months the inflation rate for food has declined as well, albeit slowly -- contrary to the many pundits who said food inflation would continue to rise despite deflation elsewhere.
Deflation is occurring at all stages of production. Producer prices (red) and crude goods prices (orange) continue to falling at a faster rate than Consumer inflation. Both crude goods and Producer price DEflation on a YoY basis exceed Consumer DEflation:
This was the normal pattern in all post-WW2 recessions, and signified that the recession was in its latter stage, or even was ending.
This time something worse is happening. We are on the cusp of a deflationary wage spiral as well. According to the Los Angeles Times, for the first time since the Great Depression:
Broad-based pay cuts, long frowned upon, are being imposed by a growing number of companies big and small....
FedEx Corp. cut wages for 36,000 salaried workers by 5% last month; at construction equipment maker Caterpillar, many employees will see their pay reduced by as much as 15%. Gymboree Corp., the San Francisco-based children's clothing retailer, is cutting senior executives' salaries by up to 15% and the pay of some other staffers by as much as 10%.
Union workers at YRC Worldwide Inc., the nation's biggest trucking company, voted last week to accept an across-the-board 10% pay cut to help their employer weather the slump in freight traffic.
At the Newport Beach office of MBH Architects, salaries for partners and many professional staff were slashed 25% to 50% as clients canceled projects and billings fell off a cliff.
...[E]xperts say it is a sign that some employers are resorting to exceptional measures to deal with the crumbling economy.
For all of those who thought deflation would be good, the above is your answer.
And if you want to be even more frightened, look at the graph of consumer prices (blue) vs. producer raw commodity prices (orange) during the deflationary Roaring 20s and Great Depression period:
This graph is the one that really scares me. Of the 7 deflationary recessions between 1920 and 1950, in 5 of them - including the Great Depression - commodity prices (orange) declined, and declined faster than consumer prices (blue) from the very start of the recession.
I will have a lot more to say about this in the next week or two. For now, take away this point: we will almost certainly know in the next 60-90 days whether or not we are starting the first full-fledged deflationary wage-price spiral in over 70 years. If that happens, it will make the entire crisis up until now feel like a walk in the park.
Update 2: A few people are questioning whether this isn't "real" but just a reflection of the bursting oil bubble. Certainly if the consumer was strong and wages were holding up, that might be the case. In response to which, I give you the following graph of year-voer-year retail sales from Calculated Risk:
The chart at the top of this diary shows every single deflationary event in the last 100 years., where the deflation rate has exceeded ( - 1.5%) (hence the middle column). Every single one of them has coincided with a recession, including two of the steepest of all, with the sole exception of one month in 1928.
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Update 3 (10:15 AM e.s.t). I have an appointment and have to leave for a few hours, but I will be back and respond to comments then. Thanks for all the Recommendations.