The above chart shows a very simple economic truth: you always want a little inflation in the economy. A little inflation indicates that there is enough pricing power somewhere in the buying cycle for someone to raise prices. And that indicates there is enough demand pull or cost push inflation that is the result of increasing economic activity. Now we can debate the proper level of inflation for the economy, but the bottom line is we always want some.
A.) This is what scared the hell out of everybody. It is deflation:
A general decline in prices, often caused by a reduction in the supply of money or credit. Deflation can be caused also by a decrease in government, personal or investment spending. The opposite of inflation, deflation has the side effect of increased unemployment since there is a lower level of demand in the economy, which can lead to an economic depression. Central banks attempt to stop severe deflation, along with severe inflation, in an attempt to keep the excessive drop in prices to a minimum.
This was a primary reason why there was such a rush to get the stimulus package done. It looked as though we were going to start a deflationary spiral. This is one of the primary causes of the Great Depression -- a general collapse in prices caused by a corresponding drop in demand.
B.) Now we again have inflation -- a slight increase in prices. That tells us that somewhere out there in the economy is pricing power - the ability to raise prices. That means that somewhere there is enough demand pull or cost push inflation to be able to increase prices. And that is an incredibly health and important economic development.
