Deflation Article

Deflation and politics

May 2003

Economic policy and the state of the economy is a key factor in any election and George W. knows this better than anyone. Remember, the poor state of the economy gave Clinton the edge to beat George Sr. after his first term in office.  I doubt George W. will repeat his father's mistake. This month's deflation numbers could be the key to winning the next election...

I believe it is quite possible that the government will use April's  monthly correction back to normal oil prices as an excuse to "fight deflation" and begin re-inflating  the economy just in time for the next presidential election. My guess is that by next November the economy will be humming along very nicely due to the liquidity that will be flowing soon. And George W. will be riding high into another 4 years in office. With higher liquidity over the next year,  stocks and housing should also do well.

A favorite tactic of news commentators, is to simply extend the current trend on to infinity. This past month the inflation rate fell sharply primarily due to the return of Oil prices back to normal.  The CPI-U fell .2% for the month or an annualized fall of 2.4% . The interesting thing is that if we did the same thing for the previous month we would have a chart that looked like this one except UPSIDEDOWN! Because of the steep rise in oil prices in January and February inflation was climbing rapidly. 

If we extended February's numbers we could claim a rise to double digit inflation in the next few months. Neither scenario is correct. The average of both months is an annual inflation rate of 2.4% very similar to  the inflation rate of last year.

To Find out more about Deflation-
Read the Following Articles:

 What is Deflation? and Deflation and Politics

An Investment Lesson from Deflation Scares

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