Deflation Doldrums?

The rate of inflation is now close to zero in the US and several other major countries. Deflation is potentially a very serious problem, because falling prices – and the expectation that prices will continue to fall – would make the current economic downturn worse in three distinct ways.

CAMBRIDGE – The rate of inflation is now close to zero in the United States and several other major countries. The Economist recently reported that economists it had surveyed predict that consumer prices in the US and Japan will actually fall for 2009 as a whole, while inflation in the euro zone will be only 0.6%. South Korea, Taiwan, and Thailand will also see declines in consumer price levels.

The prospect of falling prices reflects the collapse of industrial production, the resulting high level of unemployment, and the dramatic decline in commodity prices. Industrial production is falling at double-digit rates in the negative-inflation countries, and the price index for all commodities is down more than 30% over the past year.

Deflation is potentially a very serious problem, because falling prices – and the expectation that prices will continue to fall – would make the current economic downturn worse in three distinct ways.

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