Monday, February 2, 2009


The financial world changed last fall, as I have noted in earlier posts. The economy is still feeling the aftershocks of the fall of Fannie, Freddie, Lehman Brothers and other financial institutions.

One statistic that recently caught my eye is inflation. This graph shows inflation as measured by the Consumer Price Index (CPI) for every year since Yankee was formed in 1995:

Inflation fell off a cliff in 2008! The highest inflation in the period 1995-2007 was 4.1% in 2007. Inflation continued at a high level in the first part of 2008 with monthly year-over-year inflation reaching a peak of 5.6% in July. But the world changed shortly after that, and we have now seen five consecutive months of deflation. Inflation for calendar year 2008 was a miniscule 0.1%. This is the lowest yearly inflation rate since 1954. Many economists are predicting that we will soon see monthly year-over-year deflation, perhaps with the January CPI numbers which are scheduled to be released February 20th.

This is a profound change from earlier in my career when there were 30 months in the years 1979-81 that the year-over-year inflation rate was greater than 10%, reaching a peak of 14.8% in March 1980. (Calendar year inflation rates for that period were: 1979 - 13.3%; 1980 - 12.5%; 1981 - 8.9%.)

Inflation affects interest rates. Interest rates are presently very low (see this earlier post), whereas they were high in 1979-1981. Prime peaked at 21.5% (!!) in December 1980. Prime is presently 3.25%. The last time prime was this low was in October 1955.

My source of data is FRED, an economic database maintained by the Federal Reserve Bank of St. Louis. FRED has CPI data going back to 1913. In that period, there were 158 months of negative year-over-year inflation, almost 14% of the time. The country has survived this before. But the last time was in August 1955, so most people now living have not experienced deflation in their lifetime.

NOTE: CPI data in this post is CPI-U not seasonally adjusted. More historical data is available for CPI-U not seasonally adjusted (back to 1913) than for CPI-U seasonally adjusted (back to 1947).

UPDATE 2/20/09: The CPI rose 0.4% in January, after falling for five consecutive months. The year-over-year increase was 0.0%. While not showing deflation, this is the first time since August 1955 that we have not had inflation.

UPDATE 4/15/09: The year-over-year change for February (released a month ago) was +0.2%. No deflation yet. But the year-over-year change for March (released today) was -0.4%. Now this statistic shows deflation for the first time since August 1955.

UPDATE 5/15/09: The year-over-year change for April was -0.7%, so the deflation in March was not a one-month fluke.