Debunking Deflation

I probably shouldn't second-guess Fed Chief Greenspan, but I have a different view about deflation: It isn't happening and it isn't on the horizon.

Sure, Greenspan told Congress yesterday that deflation "is sufficiently large that it does require very close scrutiny and maybe action on the part of the central bank." And, yes, April's headline Consumer Price Index number showed a 0.3% decline. But let's drill into the recent inflation figures and consider inflationary forces at work around the country.

Here's how the CPI breaks down: housing accounts for 40.04% of the index; transportation gets a 17.77% weighting; food and beverage consumes another 15.45%. and medical care reflects 5.56% of any price change in the index. These four groups alone account for the bulk -- 78.82% -- of the CPI.

Now let's look at prices in the two states that set trends for the country, California and New York.

Rents Still Inflated

Just this week, the California Association of Realtors reported that the median price of an existing, single-family detached home hit a new record during the first quarter of 2003, jumping 14.3% to $337,780. And in the Greater Los Angeles region, where more than half the California population resides, rents are expected to increase 8% to 15% between now and the end of September 2004, according to the University of Southern California's Lusk Center for Real Estate.

New York is no bargain, either. Rents for small, Upper West Side apartments in Manhattan are still going for $3,000 a month. I should know -- that's what I recently paid before moving back to California late last year. Lower-income tenants have higher rents to look forward to now as well. New York's Rent Guideline Board just gave preliminary approval to jack up 1-year rent-stabilized leases by 5.5% beginning in September. The justification? Higher operating expenses from their own escalating Price Index of Operating Costs.