The problem is not deflation, it's attempts to prevent it

Let's investigate the Fed's effort to prevent price deflation.

Here's a Tweet that caught my eye. 

"Problem with deflation is- Why buy anything if you know it will be cheaper in the future.," responded one person. 

Let's investigate that question starting with a look at the CPI basket.

CPI Percentage Weights

Why Buy Anything Questionnaire

Q: If consumers think the price of food will drop, will they stop eating?
Q: If consumers think the price of natural gas will drop, will they stop heating their homes? 
Q: If consumers think the price of gasoline will drop, will they stop driving?
Q: If consumers think the price of rent will drop, will they hold off renting until that happens?
Q: If consumers think the price of rent will rise, will they rent two apartments to take advantage?
Q: If consumers think the price of taxis will rise, will they take multiple taxi rides on advance?
Q: If people need an operation, will they hold off if they think prices might drop next month?
Q: If people need an operation, will they have two operations if they expect the price will go up?

All of the above questions represent inelastic items. Those constitute over 80% of the CPI.  Let’s hone in on the elastic portion with additional Q&A.

Questions for the Fed - Elastic Items

Q: If people think the price of coats will rise will they buy a second coat they do not need?
Q: If people think the price of clothes will drop, will they stop getting dressed?
Q. The prices of TVs and electronics drop consistently. Better deals are always around the corner. Does that stop people from buying TVs and electronics?
Q. If people thought the price of TVs was about to jump, would they buy multiple TVs to take advantage?
Q. If someone needs a refrigerator, toaster, stove or a toilet because it broke, will they wait if for some reason they think prices will decline? 
Q. If someone does not need a refrigerator, toaster, stove or a toilet will they buy one anyway if they think prices will jump?

For sure, some people will wait for year-end clearances to buy cars, but most don’t. And if a car breaks down, consumers will fix it immediately, they will not wait for specials.

Stupidity Well Anchored

The above questionnaires thoroughly debunk the Fed's ridiculous spotlight on "inflation expectations". 

Yet, how many times have you heard "inflation expectations are well anchored"? 

In reality, Fed stupidity is well anchored. 

The one and only time inflation expectations matter is in a state of hyperinflation when it pays to buy nearly anything and barter it.

No Economic Benefit to Inflation

There is no economic benefit to inflation. 

My Challenge to Keynesians “Prove Rising Prices Provide an Overall Economic Benefit” has gone unanswered.

BIS Deflation Study

The BIS did a historical study and found routine price deflation was not any problem at all.

"Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive,” stated the study.

For a discussion of the BIS study, please see Historical Perspective on CPI Deflations

Asset Bubble Deflation

It’s asset bubble deflation that is damaging. When asset bubbles burst, debt deflation results.

Central banks’ seriously misguided attempts to defeat routine consumer price deflation is what fuels the destructive build up of unproductive debt and asset bubbles that eventually collapse.

Mish