The United States faces a historic period of economic deflation. Yet, even in the wake of the 2007-2009 financial crisis, only a relative few observers share this view.
However, University of Michigan economics professor Justin Wolfers does see deflation as a threat. Indeed, in a Sept. 26 piece he wrote for Bloomberg titled "Where is the Panic Over Deflation?", Wolfers states, "[T]he U.S. is experiencing deflation."
Wolfers explains why he makes this assertion in this excerpt from the article:
You can read the entire article by clicking here.
A quick point worth noting from this morning's gross domestic product report. The report is largely a yawn, containing few interesting revisions to earlier estimates of economic progress in the second quarter. But there's one number that caught my attention. The Bureau of Economic Analysis has revised its estimates for the personal consumption expenditures price index. It's an important number, because this is the index the Federal Reserve targets. And remember, it's aiming for inflation of 2 percent.
Instead, the index fell in the second quarter. That is, the U.S. is experiencing deflation.
I won't overstate this. It's just one quarter, and it's evident in just one index, and even when I cherry-pick this interesting number, prices aren't really falling very quickly. The PCE deflator fell at an annual rate of only 0.1 percent in the second quarter.
But it's striking that the Fed's preferred price measure is declining at a time when the main conversation among policy makers is when and how to tighten monetary policy, rather than to make it more accommodative. ...
Right now, the risk of deflation is greater than the risk of explosive inflation.