Wednesday, July 21, 2010

4 Reasons To Fear Deflation

by Rick Newman, USnews

When the price of cars or sweaters or iPods declines, it's a break for consumers and a welcome sign that economic productivity is improving. That helps drive up living standards. But when the price of everything drops, it's an alarming development that portends stagnation.

The consumer price index, which measures inflation, declines every now and then, usually when there's a big drop in the price of volatile goods like energy or food. But there hasn't been sustained deflation in America since the early 1930s. Now, we may be on the verge of yet another unnerving economic adventure. Inflation over the last 12 months has been a scant 1.1 percent, which is below the level most economists deem optimal. And so far this year, inflation on a monthly basis has been negative as often as it's been positive. The odds are growing that low inflation could become deflation—with some economists worried that it has already started to happen. (more)

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