The Consumer Price Index, or CPI for acquaintances, is an index that measures the evolution of the prices of a given basket of consumer products or services in every economy. Thanks to the CPI, we can know from year to year the evolution of our purchasing power, or what is the same, how many basic things that compute in the index we will be able to buy with the same € 100 of the previous year.
But that embarrassing social chasm, of which extreme political polarization is just one more symptom, threatens to continue to widen despite having closed? The Great Recession, to the point of having made it necessary to draw an index of “poor” inflation in the US, in order to know at least what is of its socioeconomic life.
Inflation or deflation, “That (not) is the question.”
Since capitalism is capitalism, except for large deflationary depressions, or sustained deflations as it comes and goes in the Japanese economy, it is almost a rule that prices rise (in theory) every year in a percentage determined in each case by a mix of factors. Among them are the (theoretical) supply and demand market rule, state regulations, censurable monopolistic and anti-competition practices or price manipulations through cartels (against which the brave commissioner of competition Vestager is always vigilant), or let us simply leave the price whoever it is set for each product or service.
While it is true that there is residual inflation whose existence is a good and healthy economic mechanism to “grease” the macro and micro-economic gears of individuals, families, states, and companies, it is no less true that its negative sister deflation is a serious economic problem, in which the management of any macro or micro-economy becomes practically impossible with minimum standards of quality in management and in economic and business forecasts.
Get an idea, for example, of the complexity for a company to make its economic forecasts for each year that begins, as well as set the estimated sale price of its products, which is the Gordian knot that must estimate (and mostly be right) to prepare its budgets and structure all the accounts of the company: assuming that prices are almost always variable by nature, it is much less harmful to the accounts of any socioeconomic agent that has a vegetative inflation that will always play in it (today for Fortunately light today) own favor, that a deflation will gradually be eroding margins.
But it is no less true that this reasoning of deflationary unpredictability would also apply to the unpredictability that inflation brings to the costs with which a company manufactures, or with which a family has to buy, hence the great commitment of banks to keep inflation under control and without runaway. Because this is also where the second and most destructive anti-economic factor that would bring deflation and that makes moderate inflation infinitely more preferable comes into play: deflation delays purchasing decisions and also with it feeds itself. Indeed, and as has been seen for example in Japan in several years of the last decades, if for example you are going to buy a car of € 15,000, and you can still throw a little more with the one you have, that not only will provide financial benefits by delaying the disbursement, is that in addition the savings is double and much more striking for consumers: in a deflationary environment, the later you buy that car, the lower its price, and cheaper it will come out. And at lower demand today in a crisis environment, manufacturers will lower their price even more (if the costs allow it): hence, I told them that deflation is fed back.
As you can see, that deflation that some see as the possibility that consumers and companies can save year by year with increasingly cheaper purchases, is actually a real economic cancer in the longer terms and ends up destroying socioeconomic fabric, state of welfare, and destroying employment. Now, once inflation is assumed as a necessary minor evil and, worth the contradiction, beneficial to some extent, what is that turning point that marks the border between benign and malignant inflation?
The difficult economic question this, but the truth is that the general consensus of those great vigilantes of last resort of the inflationary evolution that are the Central Banks, at the moment, sets their annual inflation target significantly in the surroundings of a salomonico 2 %.
A figure that allows at the same time a certain economic margin that allows these infinitely simpler economic forecasts and budgets to catch air in an inflationary environment, and that at the same time avoids strongly eroding the purchasing power of consumers and companies. Obviously, this vegetative inflation is not a guarantee of hardly anything, since the other great variable with influence on the purchasing capacity of individuals is their family income, and that is where the last drifts of capitalism fall with the whole team (yes, despite the recent revitalization of wages, which unfortunately comes too late.