Earn What You Spend

The cost of everything, it seems, always goes up.  But not now - for the first time in my lifetime, prices of everything - from housing to food to clothing -  are going down.

The consumer price index dropped 1.7% last month on a seasonally adjusted basis, the Labor Department said Tuesday, the largest drop since the government started compiling the figures in 1947 and well in excess of the 1.3% decline Wall Street economists had expected.

The core CPI was unchanged last month following October’s decline, which was the first in more than 25 years.

David Leonhardt from the NYTimes continues: 

The cost of fruits, vegetables, clothing and vehicles are all dropping. Housing prices have been falling for more than two years, and a barrel of oil costs about $45, down from $145 in July.

The inflation report released by the government on Tuesday showed that the Consumer Price Index was 3 percent lower last month than it had been three months earlier. It was the steepest such drop since 1933.

Lower prices isn’t always a good thing, it is important to note.  The deflationary period in Japan’s economy is a prime example of what we don’t want to repeat.  But for those who are still gainfully employed (a decreasing number, to be sure), and to those who have been quite conservative with their investments, the cost of living is dropping.  And that can offer some degree of solace in a time like this.  

It’s not dissimilar to what Warren Buffet has done, though here we are focused on consumption instead of investments.  Buffet is famous for having lots of cash on hand to take advantage of downturns in the economy, those times when the price for an investment are much lower than the underlying value of the asset.  One can think of the current drop in consumer prices in a similar fashion - if you were ever in the market for a flat screen TV, and you have kept your financial senses about you enough to have cash on hand - its hard to imagine a time when you could find a better price.  Of course this is not to say you should do this, or that it is wise to do so - I’m simply pointing out the way things are.