Europe and US still at risk from deflation trap

The Telegraph ^ | 8/14/2009 | Edmund Conway

[bruinbirdman]

The developed world has not shaken off the risk of sliding into a deflation trap, experts warned after new figures showed that prices in both the eurozone and the US are falling.

Consumer prices in America slipped by 2.1pc in the year to July, according to official data released yesterday. It coincided with Eurostat figures showing that the eurozone's consumer price index dropped by 0.7pc in the past year, compared with deflation of 0.1pc in June.

The figures underline concerns that despite the sharp rebound in a variety of economic indicators, and despite news that France and Germany have both now pulled out of recession, the threat posed by deflation has not yet been extinguished. Indeed, the fall in consumer prices over the past year in the US represents the biggest such drop since January 1950, and means that the country has now been in deflation for eight months.

Gabriel Stein, of Lombard Street Research, said: "Ultimately, US consumer prices will not rise on a sustained basis until the negative output gap has closed and a positive output gap opened instead. At some stage, this will happen. But not for some time."

The price figures, which showed that despite the annual fall prices were flat on the month, coincided with data showing that US consumers' confidence has slid yet further amid worries about the state of the jobs market and wages.

The University of Michigan consumer sentiment barometer dropped from 66 points to 63.2 this month – the lowest since March, from 66 in July. The measure reached a three-decade low of 55.3 in November. The Labor Department said its consumer price index was unchanged from June as forecast, and dropped by 2.1pc – the most in six decades – from July 2008. Economists had expected the index to

[Zakeet]

I wish we really were caught in a "deflation trap" rather than the impending hyperinflation caused by massive deficits. The former is much easier to fix than the latter.

[FastCoyote]

Obummer! I thought this had all been solved by spending a few mega Brazillion Dollars we don’t have on things we don’t need.

[Truth29]

I know these indices exclude food and energy, but it is hard to believe the CPI when groceries steadily increase in price each month and food is a large part of the average consumers monthly expenses.

[Right Wing Assault]

I sure don’t see prices going down n the things I buy.

[screaminsunshine]

I do not think they use food and energy. Survival good like that will inflate but not show up on the index.

[Company Man]

Many knowledgeable gold bugs, er, experts, are predicting “hyper-stagflation” ; i.e. jobs crashing even as prices go through the roof.

[DeuceTraveler]

The worst of all scenarios. Less spending by consumers which will deflate the economy but hyperinflation which will lead to job losses, high prices for necessities and the destruction of the economy followed by civil unrest and crack downs by the goverment to maintain order. Welcome to the banana republic of the united states.

[piasa]

Obummer! I thought this had all been solved by spending a few mega Brazillion Dollars we don’t have on things we don’t need.

Most of it hasn't been spent yet- just allocated. Obama & congress's going to spend a big chunk of it in a mad rush just prior to the 2010 election, while it will appear to do some good, but not so far ahead that the consequences of the spree become obvious before election day.

[2harddrive]

Deflation is not a trap, but a BLESSING - if it EVER occurs! I am getting tired of waiting.