Deflation: 1931 vs. Today

Copyright, The New York Times Company

Deflation has returned this summer, but it’s still nothing like what happened in the Great Depression years of 1929-33.

During most of our lifetimes, the prices of things we buy have generally increased over time. We can name some exceptions, but otherwise most items (even houses) carry prices that are higher now than they were 10, 20 or 30 years ago.

This general increase in consumer prices — often called inflation — has become familiar. Employees expect regular pay raises, and employers can normally afford them because they are increasing the prices of the products they sell.

On rare occasions, consumer price trends suddenly change directions.

One occasion was 1929. Consumer prices were pretty constant during the 1920s. The chart below picks up the story in January 1929 with the red line. That line measures the seasonally unadjusted consumer price index in each month through July 1930, normalized so that October 1929 is 100 (for example, the value of 97.9 in April 1929 means that prices then were 2.1 percent lower than they would be in October).

Prices were heading up in the spring and summer of 1929, during which time lenders might have expected that the typical homeowner would obtain a pay raise and the typical farmer would someday fetch more for his crops — in both cases making it easy for them to pay their respective mortgages.

In the fall of 1929, the inflation stopped and prices headed down (incidentally, that’s when the Great Depression began), falling almost every month for nearly four years. By the summer of 1931, when the Depression was about two years old, this deflation had brought prices down almost 13 percent from their 1929 peak. It was difficult for homeowners and farmers to make mortgage payments as their income fell sharply.

The blue line in the chart shows the consumer price index for 2008-10. Like the 1929 series, the 2008 series is normalized so that October is 100.

The chart shows that consumer prices also rose in the spring and early summer of 2008. Inflation had stopped by the fall, and consumer prices headed down. Unlike the deflation of 1929, the deflation of 2008 lasted only a couple of months, after which time consumer prices increased for more than a year.

On Friday, the Bureau of Labor Statistics reported that consumer prices had fallen three months in a row since March 2010. That’s not good news, because our economy could benefit from some inflation. But the silver lining is that the latest deflation is mild, and so far short-lived.