Fed's outlook brightens. Is deflation still a threat?

|
Issei Kato/Reuters
Japanese retailers (like this one in Tokyo) have had to cope with consumer prices that have slid in nine of the last 10 years.

The threat of global deflation is waning.

Stock markets and commodity prices have rebounded and recession forces seem to be abating. Now, the Federal Reserve is revising upward its economic forecasts for the year, further pushing back concerns of coming deflation.

On Wednesday, the Federal Reserve released the minutes of its June meeting, in which it said the economy wouldn't contract quite as severely as it projected in April. Instead of a 1.3 to 2.0 percent contraction in gross domestic product (GDP), it was forecasting a 1.0 to 1.5 contraction.

As a result, inflation this year would be about half a percentage point above its April projection: in the range of 1.0 to 1.4 percent, it said. The Fed raised its inflation forecasts a bit for 2010 and 2011 as well.

So if deflation fears are retreating (and inflation fears advancing), why are some prominent economists still warning about declining prices, as the World Bank's chief economist did today?

Because deflation is a "slow burn," as Harvard economist Ken Rogoff explained to NPR. Once it takes hold, it tends to grind on.

The United States isn't there yet in any real sense. Yes, consumer prices in June were down 1.4 percent in June from a year ago, but that was all due to a 25 percent decline in energy prices, the US Labor Department reported Wednesday. Stripping out energy and food items, prices actually rose 1.7 percent during that period.

Internationally, the threat of deflation looms larger. In this decade, the only developed nation that saw year-to-year deflation was Japan (and Finland, for a single year), according to the Organization for Economic Cooperation and Development (OECD). Japan's consumer prices (stripping out energy and food, again) declined every year from 1999 to 2007. In 2008, they rose a minuscule 0.1 percent.

Since then, its prices have moved down again. In May, they stood at a level that, if they held there for the entire year, would be the lowest since 1993. What's more, four other OECD nations have also seen price deflation this year: Finland, Germany, Ireland, and Sweden.

That's never happened since the OECD began aggregating consumer prices in 1970. In fact, from 1970 until 1997, I can't find any OECD nation that experienced even a single year of deflation.

By themselves, these numbers don't say much about the future because they're backward-looking, writes Barry Eichengreen, an economist at the University of California at Berkeley, in an e-mail. The real issue is how the next period plays out.

"You have to decide whether you agree with Macroeconomic Advisors and JPMorgan that there is now going to be a strong recovery of demand," he writes. "Or whether you agree with me that demand will remain weak for some time, in which case we are not yet out of the deflationary woods."

It may take years to really know the answer, says blogger Francis Cianfrocca, in a recent post.
____________
– Don't forget to Twitter us.

You've read  of  free articles. Subscribe to continue.
QR Code to Fed's outlook brightens. Is deflation still a threat?
Read this article in
https://www.csmonitor.com/Business/new-economy/2009/0715/feds-outlook-brightens-is-deflation-still-a-threat
QR Code to Subscription page
Start your subscription today
https://www.csmonitor.com/subscribe