Flat consumer prices could make paydays worth less

US Dollar

A dollar won't go as far, should deflation set it. Image from Wikimedia Commons.

Recent data was released that indicated that the consumer price index has barely moved for a long time. For months on end, prices of goods and services have remained essentially flat. It means that no one has needed instant cash to make a usual purchase, but that is not all. Part and parcel to the price index has been a near zero federal interest rate. An interest rate that holds steady at a low threshold is practically the Fifth Horseman of the Apocalypse, as it usually signals deflation.

Consumer prices low and slow

The Department of Commerce tracks the rise or fall of prices of goods and services, called the Consumer Price Index. For August, the CPI rose by 0.3 percent, after a 0.3 rise in July, according to the New York Times. The rise was attributed to prices of food and energy rising. Aside from those two goods, consumer prices have barely changed at all. Cost of goods and services is tied to demand, and with unemployment as high as it is, hardly anyone is willing to spend much. It definitely means less payday cash for retailers.

Interest rates at rock bottom

Along with consumer prices staying low, federal interest rates have been at near zero for months. The interest rate set by the Federal Reserve is the interest rate charged to banks when they borrow money or lend short term loans to other banks. Usually these loans are used for loan credit. Keeping the rates low means more borrowing. There is a catch. When banks don’t want to lend, it means less economic activity is taking place. When that happens, money starts to lose value, as hardly any of the money supply is being used. That is called deflation.

Low federal rates are not good

If deflation sets in, value of goods will go down, but prices will go up in order to keep suppliers in business. However, that will not be accompanied by a rise in wages.


New York Times

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