Producer prices up is a good thing

Analysis: Such is the nature of panic that when minor news is slightly negative there can be a massive response.  One of the sources of panic of late has been a fear of deflation setting in.  I have discussed the evils of deflation on the blog before but here is a short refresher.

If consumers consistently expect prices to go down on all goods they don’t have an incentive to spend money NOW.  Instead, they wait until sometime in the future to spend their money when prices are assured to be lower.  This is deflation.  A little inflation is good for an economy because in the back of buyers’ minds is the idea that if they wait to make a purchase it will just cost them more money in the future.  Deflation has crippled Japan’s economy for almost 20 years.  Japanese consumers have entrenched in their spending behavior a belief that waiting to buy something will result in a lower price.  So economic pundits and investors have been looking for such signs in the U.S. economy.

That’s why today’s Department of Labor news of producer prices being up 0.2% in July as compared to June was such a welcome piece of news.  You see, this was the first increase since March.  Consequently, traders (not investors) who have feared deflation are piling back into equities.  So that infinitesimal 0.2% increase is worth billions of dollars in equity price increases.  Silly, isn’t it?

Importance grade: 8; deflation is a bad thing.  Fears of that bad thing have now been mitigated…a good thing.

Jason