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Deflation – coming to a country near you!

 

US consumer prices fell in March by 0.1% on the previous month, and 0.4% on the same month a year ago. This is the first time that deflation has been seen in the US since 1955.
 
Deflation is of particular concern because it can persuade consumers not to buy now, but to wait for a bargain as prices fall further. It also hits company profits since firms will be buying in their raw materials at relatively higher prices and selling their finished products at relatively lower prices.

These figures had not been anticipated by forecasters. The change in prices on the month showed falls in energy prices of -0.3%; food -0.1%; clothing -0.2%; and, transport -1.1%.

So, do these figures suggest that the US is about to enter some sort of deflationary spiral, where declines in prices, wages and output take turns to drive the economy downwards?

The answer to that is probably not. The main cause of the fall in prices has been the sharp turnaround in oil prices which spiked upwards last year reaching $147 in June and then fell back to the current level of around $50 a barrel. In fact, according to the US Labor Department figures, consumer energy bills have fallen 23% since March 2008, and transportation costs, which include the price of petrol and cars, fell by 13% over the same period.

 

When the most volatile elements in the consumer price index, energy and food, are removed, a figure of +1.8% year-on-year inflation is revealed. This suggests that the US does not need to move into panic mode just at the moment. In fact, some commentators are more worried about the possibility of runaway inflation sometime in the future as a result of the economic stimulus.

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Posted in Deflation, Inflation, US economy

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