As early as January, inflationary pressures in the US economy have been weak. This has caused deflationary concerns to arise, especially since spare manufacturing capacity is still high and job growth remains subdued. Although it may be true that the Fed’s quantitative easing measures and ultra-accommodative interest rates have held up expectations on inflations, the bias is still for a deflationary trap.
Let’s take a look at two of the best measures of inflation, the consumer price index and the producer price index, to back up this claim. (Don’t you just wish you paid attention to my article last week discussing the two indices? Hah!)
Looking at the figures, both the CPI and PPI figures have been printing some disappointing results as of late. This past month, the headline CPI report showed that consumer prices fell by another 0.1%, marking the third straight month of decline. Apparently, the fall was driven by drop in energy prices.
And while core CPI data showed an increase of 0.2% this past June, core prices have risen just 0.9% on a yearly basis. For those who haven’t been keeping count, this is way below the last decade’s average of 2%. Once you factor in how weak prices were from last year, I think it would be safe to say that inflationary pressures seem to be subdued.
Meanwhile, PPI data, which measures the price at which producers sell their goodies, showed a decline of 0.5%, which also marked the third consecutive month of falling prices.
If the US does sink into deflation, it could further drag economic growth down. Think about it: If consumers know that price levels will keep dropping, won’t they put off their purchases for a later date when goods are much cheaper? This would result to lower sales for companies and, with prices falling, their revenue and profits would drop too. What would happen to workers’ wages and consumer spending then? Oh the horrors!
I guess this possibility had the worrywarts up at the Fed biting their nails, troubled that the US economy would probably need additional stimulus. Are we talking an even longer “extended period” of low interest rates? If only negative interest rates were an option, the Fed would probably take that, hah! Well, that’s not looking too sunny for the Greenback…
For now, it might be better to sit tight and wait for more data confirming whether the US economy is on track towards deflation or not. Besides, we never know if the Fed could pull a few more strings here and there to keep the US from falling into a deflationary spiral.