Good Or Bad, But Surely Not Transitory

When Federal Reserve officials first started last year to mention wireless network data plans as a possible explanation for a fifth year of “transitory” factors holding back consumer price inflation, it seemed a bit transparent. One of the reasons for immediately doubting their sincerity was the history of that particular piece of the CPI (or PCE Deflator). To begin with, the unlimited data plan wars that kicked off with Verizon’s entry into them wasn’t all that much of a change for the industry.

It seemed a little weird to be suggesting falling wireless telephone prices (the category of the CPI carrying the carriers’ various products and services) were a “transitory” factor when wireless telephone prices have been falling since they were first added to the index twenty years ago. It’s kind of what they do. They may drop at times at varying rates, but by and large their direction is consistently downward, almost always a drag on the overall headline inflation rate.

Whenever analyzing monetary factors through inflation, we begin with a basic problem. Economists of generations following the Great Depression have an intense fear of deflation that didn’t uniformly exist before it. The Great Collapse starting in 1929 was a shock, to be sure, but not all deflation is monetary in origin.

In fact, the successful practice of capitalism should always lead in the direction of lower consumer prices. That’s the beauty of it, where via the right combination (the invisible hand) of labor and capital (machines or intellectual property, not cash) we consumers are able to buy more for less. It’s exactly why the CPI sub-index for Wireless Telephone Services debuted for December 1997 at 100 and is now about 48 – approximately twice as much service for the same price.

But, as noted a few days ago, it’s not always that easy to distinguish. There are other forms of deflation that aren’t so pleasant though they may seem that way on the surface. Monetary deflation is the worst, the insipid version that devastated the global economy in the early thirties and then wouldn’t really let go until Bretton Woods in 1944 (long after the world had spiraled into the true abyss of WWII). Briefly, monetary deflation is where a shortage of money is so spectacular regular folks as well as business are forced to liquidate anything and everything in order to raise cash (oftentimes so it can be further hoarded).

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