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Pending Deflation?

In a new article from the New York Times, Ben Leubsdorf asks: “When is deflation not really, well, deflation?”

He points out that United States’ prices have been consistently falling for the first time since the recession.  The CPI only rose 0.8% in December, and its expected that the index will have fallen for the month of January.  Further, the Producer Price Index for Final Demand and Personal Consumption Expenditures Price Index have reflected a similar story. [The Prof: check the BLS web site or FRED — the January CPI was released yesterday (Feb 26), with a headline of -0.7%]

However, these falling prices are mainly a function of falling oil prices — not the result of widespread falling prices.  For this reason, most experts believe that the economy’s current economic state shouldn’t invoke fear for deflation.  This idea is supported when considering that oil prices aren’t expected to last in the long run.  Further, the dollar’s current strength is also adversely affecting inflation rates.  For these reasons, most economists believe that the inflation rate will return to about 2%.

This theory has faced some opposition.  Others point to the measures of core inflation (which omits the effects of food and energy items due to their volatility) and their indication of falling prices.  Between October and January, the core CPI has fallen from 1.8% annual growth to 1.6% annual growth.  Similarly, the PCE has fallen in the same period of time.  These statistics may point that falling price levels are not simply contained to the energy sector.

What do you think? Are there other factors that you’ve noticed that could be contributing to falling prices? Should this series of falling prices be deemed as deflation?

Graph added by the Prof from FRED.


  1. HeeJu HeeJu

    This is a very interesting article; the fact that core inflation has indeed decreased over time gives some credit to the possibility of deflation. However, I still believe that diminishing global demand for oil is the major driver of falling price levels today. FED also still predicts that price level will stay low as long as the demand for oil continues to decrease. At the same time, I think it is a bit too optimistic to assume that inflation rate will naturally return to about 2% on its own without any attempt by FED to raise interest rate. Lastly, I think it is worth analyzing core inflation and core CPI in countries like Japan who has been experiencing serious threat of deflation for an extended period time now.

  2. What drives inflation? Doesn’t macro theory model it as driven by increases in labor costs (wages net of labor productivity gains)? Yes, declines in commodity prices will affect the CPI, but services are the biggest component and that component is predominantly a function of wages. So … how are labor markets doing?

    On that see the Altanta Fed’s macro blog, What’ Not Up With Wage Growth

  3. Along with “core” inflation that excludes volatile food and energy prices, there are also “trimmed mean” measures that exclude items that rose or fell a lot. See the FRED graph, which indicates a fall from 2.8% inflation in 2011 to 1.3% in the latest data. Not deflation, but these other metrics provide no hint of an uptick, and most point to a continued decline.

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