Buying a treat at my local corner store with one of my children last week caused me to have a flashback to 1960 (or so). I was doing the same thing with my dad and he said, “I remember when that cost a penny.” I found myself saying, “I remember when that cost a dime.”

I was temporally speechless when my child asked if the item was that much “bigger.” I guess it is a reasonable supposition that if the price has gone up 1000%, the product has to be bigger or better. Not just the same.

The terms “inflation” and “deflation are popping up just about everywhere, and this is the heart of the matter. It seems that economists don’t favor the latter and hands down they all favor inflation.

Looking at a choice of either of the two, I am weary of paying more for just about everything. Give me a little deflation.

Sometimes confused, but seldom baffled, I seem to find myself a little baffled these days about what exactly is going on. I am, of course, assuming that one can be “exact” and not “baffled” in an election year.

Although there is more than one way for deflation to come about, it is often the result of a constricted money supply, and falling prices are the end result of it. It is a function of the Federal Reserve. It has little to do with the business cycle, productivity, taxes, bubbles and busts or anything else — except these things provide the environment in which the Fed must apply the right monetary policy. We hope.

Inflation is also the result of Federal monetary policy. In this case, the Fed issues more money in relative comparison to the size of the economy. When the dollar has become over abundant and represents too little value, business and consumers demand more of it and prices go up. And up. Non-stop apparently.

But how do you and I and the economists judge whether we are seeing inflation or deflation? And how much of it? Is there more to it than examining the changes in the PPI or the CPI?

These indices are very complex and subject to evaluation errors and bias. They are also based on goods and services that reflect long term contracts. What then should be the standard of measurement?

Each dollar in our pocket is a claim on a small portion of the U.S. economy. The best way to judge its true worth is to examine commodities. Most commodities, especially gold, can be re-priced rapidly in reaction to monetary changes. If the price of gold goes up, the U.S. dollar is worth less; so one can conclude that there are too many dollars. Foreign currencies can also indicate the same. Take a look at the Euro.

Both gold and the Euro are “saying” inflation is happening and that there are too many dollars out there.

But recently I read that software prices declined 8.1%. Prices on televisions, VCRs and DVD players fell more than 11%. Audio-equipment prices fell 6%. Photography gear, down 6.9%. Toy prices, down 9%. Appliances, down 2.8%. Furniture and bedding, down 1.6%. The list continues. This does not say inflation. This indicates deflation.

The Fed’s efforts to create jobs and economic growth by driving inflation are being cooled by cheap imports. And, in fact, American businesses are also fighting inflation by shifting production and various services to India and China. It seems the citizens and free markets, out of necessity to be competitive, seek lower prices, yet our government avidly pursues inflation and higher prices

Here at PROFIT CONFIDENTIAL, we may be a tad idealistic, but our thinking is that the Fed’s job is to preserve the stability of the dollar, not manipulate it to achieve perpetual growth and price increases. Perhaps a political institution like the Federal Reserve cannot be trusted to act in our best interest but rather in the interest of those who seek re-election. The timing seems right for this persistent meddling.

We don’t know what the end result of all this “Feddling” will be, but one outcome is certain. If inflation wins the race, the people of America will pay more for just about everything, and their incomes will remain the same.

That you can depend on.

Tags: Economic growth, inflation, U.S. dollar, U.S. economy