Deflation Worries…Again?

Free exchange posted a piece on whether or not we should be worrying about deflation again.

Today, the BLS released September producer price data, which showed a surprising decline in headline inflation of 0.6%. Core producer prices dropped by 0.1%. And while the headline figure in August increased 1.7%, the broader trend is clearly downward:

That’s a chart of the three-month percent change in core producer prices. The last entry there is 0.0; prices have been flat since June, essentially, before which they were still increasing at a very slow pace.

Perhaps prices will not begin falling outright as the year draws to an end. Recent increases in capacity utilisation indicate that some upward pressure on prices may begin to appear. But housing cost categories will probably keep falling, and labour costs will probably keep falling. Preliminary surveys of consumers and retailers indicate that holiday spending will be depressed, and discount shopping will be quite common. The bigger threat at this point is clearly deflation, rather than inflation, and so it is somewhat disconcerting to see the Federal Reserve working to convince inflation hawks that it takes their concerns seriously.

It would make sense to hit another round of deflation.  The unemployment numbers have not gotten any better, putting a strain on consumer incomes and forcing buyers to demand lower prices.  It would be incredible if prices would dip below 0 once again considering that economic recovery (at least is believed to be) is underway.  Can an increase in GDP growth happen with receding price levels?  Maybe it is a symptom of our “jobless recovery.”

UPDATE:  Producer prices dropped 0.6% in September, while core producer prices fell 0.1%. (here) Most of the drop was from energy and food but also trucks and computers.  Weak demand is pushing prices lower.  Deflation definitely is starting to look like a reality.

UPDATE (10/21): Econbrowser has a great post showing that unemployment can have downward pressures on expected inflation.  More of the reason to assume we are in a period of deflation, no? But why has commodity prices relative to a sinking dollar not keep up?

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