DEFLATED INFLATION / THE FINANCIAL TIMES LEX

Deflated inflation

Published: August 14 2009 14:24

Beware too much of a good thing or, in this case, too little of a bad one. US consumer prices fell 2.1 per cent in July, the sharpest annual drop in almost 60 years. This takes pressure off the Federal Reserve over the timing of its exit strategy but also revives fears of a deflationary economic malaise. Moderate inflation allows companies to regain pricing power and slowly erodes consumer debt. A prolonged drop in prices would make consumers deleverage even faster and defer purchases.

Modest “core” inflation suggests price declines were driven by the collapsing commodity bubble, which peaked last July. However, the core figure was also buoyed by subsidised car sales and quirky calculations that homeownership costs were flat. Falling prices, once such distortions vanish, would imperil the recovery.

Copyright The Financial Times Limited 2009