Deflation Watch

Robert Shiller knows something about real estate and if he is correct in the predictions contained in the above chart then U.S. housing prices have a good deal further to fall and they won’t begin to level off until about 2013.  It seems unlikely that economic contraction will end before housing prices stop falling.  Thus, the problem of deflation, at least in regard to housing, would have quite a long way to go if Mr. Shilling is right.

Tuesday it was reported that U.S. home prices in October dropped 18% y/y, the most on record.

On a slightly less universal level of importance, another measure of inflation/deflation that is looking tenuous is the price of a ski pass at Vail, according to a Wall Street Journal report.   Vail has decided to leave it the same as last year.  That’s not exactly deflation, but it’s as close as you can come.  A second WSJ story confirms that deals are common in the West this years.  As the report says, “Snow has begun falling on ski slopes - and so have prices of lift tickets and luxury hotel rooms at many big destination resorts.”

As I have highlighted in recent posts (here and here), the question of whether the economy goes into a deflation for the fist time since the Great Depression is perhaps the single most important determinant of how long and deep this economic downturn will turn out to be.  Clearly housing, commodities, and much of retail are in a deflationary trend.  That does not mean that the economy as a whole is in deflation, but it’s a heck of a good start.  I will be following the indicators closely.

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