Wednesday, July 21, 2010

Deflation: 1931 vs. Today

From Economix:
Deflation has returned this summer, but it’s still nothing like what happened in the Great Depression years of 1929-33.
During most of our lifetimes, the prices of things we buy have generally increased over time. We can name some exceptions, but otherwise most items (even houses) carry prices that are higher now than they were 10, 20 or 30 years ago.
This general increase in consumer prices — often called inflation — has become familiar. Employees expect regular pay raises, and employers can normally afford them because they are increasing the prices of the products they sell.
On rare occasions, consumer price trends suddenly change directions.

One occasion was 1929. Consumer prices were pretty constant during the 1920s. The chart below picks up the story in January 1929 with the red line. That line measures the seasonally unadjusted consumer price index in each month through July 1930, normalized so that October 1929 is 100 (for example, the value of 97.9 in April 1929 means that prices then were 2.1 percent lower than they would be in October).
Prices were heading up in the spring and summer of 1929, during which time lenders might have expected that the typical homeowner would obtain a pay raise and the typical farmer would someday fetch more for his crops — in both cases making it easy for them to pay their respective mortgages....MORE