In the next 60-90 days, we will know whether or not we have started the first full-fledged deflationary wage-price spiral in over 70 years. If that happens, it will make the entire crisis up until now feel like a walk in the park. This morning the BLS reported that Consumer prices in December fell ( - 1.0 %) on a non - seasonally adjusted basis.
Inflation for the entire year 2008 was +0.1%! (meaning I have officially won my bet wtih Bonddad). In the last 5 months, prices have fallen ( - 4.4 %), or at an annual rate of ( - 11.0%)!
Yesterday, the Producer Price Index showed the first annual decline since 1950. In the last 5 months of the year, producer prices fell (-8.2%), the biggest collapse since the Great Depression. The day before that, import prices fell the most in its 26 year history.
This is the worst deflation since the Great Depression. To make matters worse, in addition to losing nearly 2 milliion jobs in the last 4 months, we may be on the cusp of a wage-price deflationary spiral as there are increasing reports of companies imposing wage cuts on their workers.
A version of this diary is cross-posted at The Economic Populist
After surging at an annual rate of nearly 10% in the first part of 2008, since the deflationary tsunami hit in July, prices have declined at an annual rate of 11%! Here is how our Deflationary Recession compares with others from the past 100 years, as of year end 2008:
There have only been two occasions in the past 100 years when there was a deeper deflationary spiral: the post-WW1 recession of 1920-1, and the Great Depression. [Update: The ( - 4.4%) decline in consumer prices in only 5 months comes close to matching the ~ ( - 5.0%) declines over a similar period in 1931-32, which was in the depths of the Great Depression. ]
Additionally, contrary to the prediction of many pundits, food price inflation also continues to abate, albeit slightly at ( - 0.1%) in December.
Deflation is occurring at all stages of production. Producer prices (red) and crude goods prices (orange) continue to falling at a faster rate than Consumer inflation. Both crude goods and Producer price DEflation on a YoY basis exceed Consumer DEflation:
This was the normal pattern in all post-WW2 recessions, and signified that the recession was in its latter stage, or even was ending.
This time something worse is happening. We are on the cusp of a deflationary wage spiral as well. According to the Los Angeles Times, for the first time since the Great Depression:
Broad-based pay cuts, long frowned upon, are being imposed by a growing number of companies big and small....
FedEx Corp. cut wages for 36,000 salaried workers by 5% last month; at construction equipment maker Caterpillar, many employees will see their pay reduced by as much as 15%. Gymboree Corp., the San Francisco-based children's clothing retailer, is cutting senior executives' salaries by up to 15% and the pay of some other staffers by as much as 10%.
Union workers at YRC Worldwide Inc., the nation's biggest trucking company, voted last week to accept an across-the-board 10% pay cut to help their employer weather the slump in freight traffic.
At the Newport Beach office of MBH Architects, salaries for partners and many professional staff were slashed 25% to 50% as clients canceled projects and billings fell off a cliff.
...[E]xperts say it is a sign that some employers are resorting to exceptional measures to deal with the crumbling economy.
For all of those who thought deflation would be good, the above is your answer.
By New Deal democrat's diary of Daily Kos.
Comment and add to the story without registration, but keep the comments meaningful please. Links are not accepted.
