Inflation? What Inflation?

Why all the talk about inflation?  Yes, Bernanke has the printing press cranked on high.  The Federal Reserve is continuing to buy the long end of the yield curve, which has historically helped banks in borrowing on the short end of the curve and lending on the long end.  The government has created many programs designed around stabilizing housing prices and helping borrowers who are facing foreclosure, but what are the results of their inflationary policies?

Today from the BLS regarding this morning’s CPI report:

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.3 percent in August on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. … Over the last 12 months, the all items index increased 1.1 percent before seasonal adjustment.
…
The index for all items less food and energy was unchanged in August … Over the last 12 months, the index for all items less food and energy rose 0.9 percent …

Does this sound like the rampant inflation that pundits are leading us to believe is down the road?  Seems like deflationary pressures are still extremely prevalent.  It’s visible not only in the continued pressure on real estate prices, but wages and unemployment continue to be less than steller.  Corporations may have seen great earnings last quarter, but they are sitting on piles of cash, uncertain about the future, unwilling to spend, hire and invest.

Deflation in itself is not always a bad thing.  Economists will tell you deflation is bad because it causes consumers to delay purchases with the expectation that they can get those same goods cheaper in the near future.  This may be true in some cases, but look at the technology sector as an area where this never holds true.  Computers, software, plasma TV’s have gotten cheaper and cheaper as technology improves and the product quality and manufacturing improves.  A $1,000 computer today is vastly superior to a $1,000 computer 3 years ago.  But it hasn’t slowed consumers from developing an appetite for tech products despite deflation in that sector.  In fact, deflation has helped this entire industry tremendously and brought consumers affordable quality products.

So in what ways is deflation a bad thing?  Well, if you are a small business owner who purchased a business or leveraged their house in the bubble years and has a massive debt load with shrinking revenues, deflation is a killer.  The debt service payments remain the same, but you have less and less cash coming into the bank account.  The value of your home and business collateral is diminishing, you are experiencing credit deflation, and this in itself is a bad thing.  You need a bailout, a fresh start, a way to remove or reduce the debt service payments so that you can have a chance to survive.  Typically these business owners have done nothing wrong other than take on credit at the wrong time.  This type of deflation is very prevalent these days and will kill your business if you do not take action.  Give Second Wind a call to discuss your options.