NCPA - National Center for Policy Analysis

Deflation Isn't Happening

November 5, 1998

Prices in some areas of the economy are falling. For instance, energy prices have dropped almost 10 percent in the last year; commodity prices have dropped by about 20 percent; and prices of raw materials, clothes and imported goods have declined -- partly because of the collapse of economies in Southeast Asia.

But those who doubt that we are in for a bout of deflation point to rising prices in other areas:

  • Producer prices -- excluding energy and food -- are rising about 1 percent a year.
  • Consumer prices are increasing about 2 percent a year.
  • Wages and salaries have been rising about 4 percent a year -- which does not suggest an imminent decline in prices for goods and services, since labor costs typically account for two-thirds of their prices.
  • Prices can fall in an atmosphere of strong productivity growth, but productivity is now rising by less than 2 percent a year.

So to many economists the talk of possible deflation is premature, to say the least.

The last time the U.S. experienced severe deflation was during the Great Depression. Nobody sees today's Federal Reserve making the same disastrous mistakes it made then.

Source: Michael M. Weinstein, "Deflation Is Frightening, But Toothless, For 90's America," New York Times, November 5, 1998.

 

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