Summary: Rolling deflation surprises Arkansas government.

(March 2009) The Consumer Price Index, an inflation measure, was zero in 2008, the lowest reading since 1955 (U.S. Bureau of Labor Statistics, Federal Reserve Bank of Minneapolis). Declining asset classes have left unprepared Americans exposed to the economic phenomenon of deflation. “Thinking about deflation,” the Policy Foundation warned in a 2001 Arkansas Democrat-Gazette column1, “could lead many to carefully examine their own balance sheets and assumptions about credit and the economy.”

Arkansas government units have also been surprised by rolling deflation, a phenomenon whereby deflation appears, disappears and reappears in a multi-year period. Examples include:

  • Deflating property asset classes have Arkansas county tax collectors fearful they may be unable to collect assessments to fund services including education. (“Now, even tax collectors are singing the blues,” Democrat-Gazette, February 9, 2009)

  • Declining commodity prices have sent the NYMEX natural gas futures contract to a price less than $4, half the $8 level used in the 2008 state revenue estimate for the severance tax hike.

  • The CPI’s decline forced Arkansas legislators to lower a 3.85 percent pay raise they approved earlier in 2009 to 3.3 percent. “This was the first time that we are aware that the year-end (CPI) has gone down on an average basis, and it was because of the drastic drop in the economy in the fourth quarter,” said State Rep. Bruce Maloch, D-Magnolia. (“Mistake leads to 2nd pay-raise measure,” Democrat-Gazette, January 29, 2009)

A 2002 Policy Foundation memo, “Rolling Deflation” noted Arkansas businesses that understand deflation “have emphasized product differentiation, increased volume sales, and grown profits while outstate competitors who did not understand have failed.”

— Greg Kaza

 

1 Kaza, Greg. “Thoughts On Deflation.” Arkansas Democrat-Gazette. Aug. 11, 2001.