Consumer Prices Falling

This article on bloomber.com caught my attention:

Many economist have been warning that as the Fed continues to inject hoards of cash into our struggling economy that inflation will soar, thus effecting the purchasing power of Americans. Such effects are not yet evident as consumer prices actually saw an annual drop for the first time in over 50 years. It was reported that the consumer price index fell .4 percent in March from the previous year. These figures signal deflation and may be due to the global recession keeping prices low. Some would view this as a bigger danger than current manufacturing and production data that is effecting businesses' outlook on the economy. It is not likely however that consumer prices will downspiral. As senior economist Carl Riccadonna stated,“The more slack there is in the system, the longer it will take for inflation to become a concern.” The effect of the Fed's massive spending I would assume will be seen further down the road.


anthony said...

I agree. It is very likely we will see inflation soar, but it will take a lot more time for the excess money to flow through our system. Hopefully, our recession fears will be over when we have to deal with inflation. That way, the Federal Reserve can start raising interest rates without worry of impeding the growth of the economy.

Landon said...

Maybe this would be a time to see the Federal Reserve try to do some other policy besides raising interest rates. I agree with anthony that this would work and that inflation is likely. However, one of the major problems with the Fed is there restricted tools to fix the economy. What I am saying is that the Fed needs to fix these things now, not wait and see if they can raise interest. I have no proposition to help them do so, nor would I be qualified, but there are those who are and can. The Fed needs to start working on the issue now and coming up with a fix.

Dr. Tufte said...

-1 on Julian and Landon for spelling errors.

The idea that money is related to inflation largely works through the income side of the economy.

But ... this time around what the Fed has been doing is largely replacing non-liquid wealth in private hands with more liquid wealth (money). It isn't clear at all that this will be inflationary: if people don't spend it, how will prices get pushed up?

No doubt there is some inflationary effect. What we observe in inflation is a mix of effects from the private sector and monetary policy effects. So, if we observe a little deflation after a lot of expansionary policy it means that the deflation could've been a whole lot worse.