The chief gauge of inflation in the economy, the Consumer Price Index (CPI), fell for the first time in 50 years in March. This is potentially frightening to a lot of economists as it is an indication of possible deflation in the economy. Why do economists prefer inflation, rising prices, to deflation, falling prices? The problem is that if deflation becomes rampant (i.e. predictable), then consumers delay their purchases because they know that prices are going to fall going forward. By delaying their purchases the economy is in a constant state of anticipation and waiting. Not good. A wee bit of inflation is an inducement to spend money now.
But before you get spooked, CPI declined by a modest 0.1%. The majority of this decline was in energy and energy-related goods. Meanwhile, the so-called core-CPI, actually rose 0.2%. Also, the figures were in line with expectations. So, in other words, the CPI results are not a big deal. Does this all make sense?
Jason
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