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.