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Deflation, Not Inflation, is Likely To Result From Current Commodity Price Hikes

(PRWEB) September 20, 2005 -- If you are old enough to remember the America of the 1970s, then you probably remember those inflationary days when the price of everything seemed to be constantly going up. Most importantly, wages were also rising right along with the price of everything else. In today's supply-dominated economy, however, where there's too much of just about everything, particularly labor, it's easy to forget that wages count for about two-thirds of overall economic activity, and that no significant boost in the overall rate of inflation can occur without the participation of wages. And if wages don't go up, then the higher cost of one budget item simply means a cutback in spending on something else—that's deflation, not inflation.

Ask yourself if your employer stands ready to increase your wages right along with the price of gasoline, heating oil, home ownership, taxes, etc. If the answer is no, then you've also answered the question of whether or not the United States is in for another bout of rampant inflation as a result of recent oil-related price hikes.

International economist James A. McCune of Business Restoration Partners, a New Jersey economic consulting firm, has just finished a comprehensive ten-year forecast of the Chinese economy (The China Report: China's Economy Through 2015), and contrasts China's current situation with that of the U.S.: "China is running a trade surplus and is the low-cost producer of most of the goods the country sells, so their economy is demand driven. That means cost increases, when they occur, can be passed on down the line and no one loses much, if any, market share. In the U.S. situation it's just the opposite: with a massive trade deficit and high wages, by international comparison, producers have lost price discretion. If too much in the way of cost increases are passed on to customers in the form of higher prices, American companies will lose the bulk of their customers to lower-priced competitors in other countries, particularly China."

Economist McCune thinks the Fed's preoccupation with inflation doesn't adequately consider the tremendous supply pressures the U.S. economy is operating under: "While the Federal Reserve is fighting the ghost of inflation's past with higher short term interest rates," quips McCune, "U.S. economic growth is set to take a breather. A lot of Americans spend more for heating oil and/or natural gas than they do for gasoline, so I expect the fourth quarter—as well as the first quarter of next year—to be quite difficult for U.S. retailers."

When asked about the outlook for next year, Mr. McCune suggested that economic weakness over the winter would bring interest rates, notably mortgage interest rates, down rather briskly: "There is a good chance that the housing bubble will be off and expanding again by Spring," states McCune, "and higher housing prices next time around will result in higher payments as most of the payment-lowering benefit of falling interest rates has already been achieved." So what about the prospects for inflation as the housing boom reaccelerates next Spring: "The same problem with of the lost price-discretion of producers remains: American business simply can't raise wages much and survive as long as the current "no import left behind" policy stays in place in the U.S.," states McCune. "Higher housing prices next Spring will pick up where gasoline and heating oil left off siphoning income away from other expenditures . . . so expect the supply-driven, import weary U.S. economy to keep excessive inflation at bay for about as far as the eye can see."

As a final remark, Mr. McCune warns of how easy serious deflation could unfold: "If U.S. consumers, in mass, ever come to grips with having no savings and the prospect of little or no Social Security, the debt balloon that allows America to be the world's "consumer of last resort" will burst, and true deflation will be upon us."

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