Inflation or Deflation? The Debate - Part 1

Inflation or deflation?

This question is currently the hottest debate in the world of economics and financial markets. What are the arguments on both sides?

Inflation Argument: The combination of government bailouts, Fed money printing, stimulus, low-interest rates, massive government debt, record fiscal deficits and monetary expansion will lead to a devaluation of the dollar and rising prices in the near future.

Deflation Argument: High and lingering unemployment, excess economic capacity, the "output gap", continued demand destruction, falling wages and further credit contraction will stifle any inflationary pressures potentially caused by those in the inflation argument above. The argument is essentially that so much wealth and credit has and will continue to be destroyed, that no amount of money printing or government stimulus will possibly lead to inflation, because the "hole" that needs to be filled is so massive.

**Please note that the following are extremely brief arguments that I have heard and believe are acceptable on both sides. Feel free to comment on or question these arguments. This is an important debate that will continue until one side wins, whenever that is.

I am still personally researching this topic on a daily basis. This week was a "big" week in terms of economic data released by the government. One data point that I saw on economist Dr. Bob Murphy's blog is the Consumer Price Index of All Goods, not seasonally adjusted. The CPI you often hear about on CNBC does not include food and energy, an odd fact considering food and energy purchases constitute a major portion of consumer expenditures. The all inclusive CPI is the first link on the Fed webpage (graph below). This is one of many useful indicators to help guide the economic forecaster on this topic in the future.

Deflation or inflation*? Thoughts? Other good indicators?

*As Dr. Murphy pointed out on his blog, Gas prices and oil rose quite a bit in the 2nd quarter, which cannot be overlooked in its contribution to the increase.

I plan to examine other indicators and will continue to research and post on this debate in the future. Hopefully we can come to a definitive conclusion by Q4 2009 to guide future investment and business related decisions.