Rates of Change in the Consumer Price Indexes of Japan and the United States, 1992-2009
Jan. 7, 2010
Here is the chart for the annual rates of change in Japan's consumer price index. The chart is scaled in ranges of two percentage points. In no 12-month period did the consumer price index fall more than 1%, and rarely by that much. This was consistent with the annual rate of increase in M2, whose rate of increase was about two to three percentage points higher. For evidence, click here.
Conclusion: There has been no "systemic price deflation" in Japan. The central bank followed policies that produced about a 2% annual increase in M2, and this resulted in flat or slightly falling consumer prices. The slight decline in the price index was a matter of central bank policy. Why did prices fall? Because the M2 supply was close to flat. Increased output in Japan, coupled with slowly rising M2, produced a slight price decline. This is consistent with what Austrian School economics teaches and also what Chicago School economics teaches. "Lots more goods chasing a slowly rising amount of yen."
Here is that chart for the consumer price index in the United States. The chart is scaled in ranges of four percentage points. Consumer prices rose in the range of 2% to 3% per annum until 2009. This was consistent with the annual change in the rate of of increase in M1. For evidence, click here.
Prices rose higher than M1 did in the mid-1990s, when M1 actually declined. But prices rose by about the same number of percentage points less than M2. There was no startling discrepancy between price changes and the money supply until 2008. That has been due to the increase in excess reserves held by commercial banks, which has dramatically lowered the M1 money multiplier.
