NCPA - National Center for Policy Analysis

Hidden Deflation

November 23, 1998

Some economists contend that we are experiencing deflation, since prices for a variety of goods from farm products to cars keep dropping. Others note that service prices keep going up -- and say we aren't experiencing deflation.

But the deflation side has an explanation for this seeming mystery: regulation. In industries facing market competition, prices are dropping. In regulated industries, they aren't.

Labor Department statistics on the transportation business demonstrate their point.

  • Over the past two years, regulated public transportation costs (buses, trains, taxicabs, subways) have gone up 1.1 percent.
  • Meanwhile private (unregulated) costs have dropped 2 percent at an annual rate.
  • Airfares dropped 4.8 percent in 1997, and although they went up 5.7 percent more recently, analysts note they are still more market-driven than public transportation, with which they are commonly lumped.
  • Elsewhere, in the private, unregulated markets, new vehicle prices have fallen two years in a row, apparel prices are down 5.4 percent in the past four years and commodity prices have fallen to near nine-year lows.

Economists argue that a combination of tight money policy and improved productivity has created sustained deflationary pressures -- but increased costs of government regulation in such areas as health and education make it appear that inflationary pressures are actually at work. But it is a mistake, analysts say, to assume that because some industries experience higher prices that deflation doesn't exist.

Source: Brian Wesbury (Griffin Kubik Stephens & Thompson Inc.), "Deflation Denial," Investor's Business Daily, November 23, 1998.


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