Deflation... It really is bad

Imagine you have just finished college and landed a new job that pays you $48,000 per year. This is very exciting. Unfortunately you also had to take out a couple student loans to pay for your education, the monthly payment for your loan is $200. Well, the first thing most college students purchase is a new car. With the new car you have an additional $400 monthly payment. Don't forget housing. You are able to share an apartment with a college buddy but it still costs you $800/month. Rent in Seattle is not cheap. Don't forget all of the other fun things you'll have to purchase like car insurance, health insurance, cell phone, cable/TV, and utilities. This will probably vary person to person but lets just assume these additional costs total $600/month.

So now you have monthly payments that total $2000. But that's okay your gross monthly income is $4,000. So you still have half of your income left for fun.  Well... don't forget taxes will probably take away 15-20% of your paycheck and you should contribute another 10% to your retirement account. So that leaves you with about $2800 per month. Sounds pretty good.

Now suppose you hear reports that inflation starts to decrease, in fact prices are actually decreasing (deflation was approximately 30% during the Great Depression). This is good... right? Look at your expenses, what is going to decrease? You signed a long-term lease, you already purchased your car, and took out your student loan years ago. Most everything you spend you money on is fixed... But what about your income? If prices start to fall, employers are going to cut your wage. Employers announce a 5% wage cut.  So now you have even less money to spend on things you enjoy. Now put yourself in the shoes of someone only making $30,000 per year...So yes deflation really is bad see here and here.

(I did my best to estimate the expensive but have probably over estimated them slight... this is all for affect).

Inflation and You

When someone talks to me about inflation the conversations varies based on that person's experience. For example, my grandmother is likely to comment on high food prices and the rising costs. My father notices the rise in gasoline prices. Most college students notice the rising tuition costs of the price increases in the coffee shops. For most, our inflationary measures are very narrow. My grandmother is older and lives on a fixed income, my father drives his RV, and most college students have a second home in the nearby coffee shop. When I mention that inflation is actually really low and not so far in the recent past we were worried about deflation I get the very puzzled looks.

The Federal Reserve Bank of Atlanta has now created a calculator that shows inflation according to household income. Instead of measuring a common household basket they have created a market basket that varies by income. Try it here.