Deflation hits the US

Consumer prices in the US are now lower than they were a year ago.

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Creative Commons License photo credit: TheTruthAbout…

This is the first time this has happened since 1955. On the one hand, this reiterates that this recession is much worse than those in recent times. On the other hand, it shows how how asset prices had become in the final years of the credit-bubble. A large cause of the declining prices was the effect of oil and energy costs. The high base from high oil prices makes it easier for prices to move backwards.

This isn’t yet enough to introduce stubborn deflation. The oil price effect is a particular feature of the data and not all components of the consumer price index are declining. Real interest rates are still positive, and with declining prices (if these were to persist) there is not way through interest rate policy to change this.

The much-feared, poorly understood “quantitative easing” may be required to boost the money supply and encourage some inflation.

While serious deflation is probably not a major risk, the risk of massive inflation arising out of overdone quantitative easy, government spending and low interest rates should still be a concern for the dollar in the medium term.