Is Deflation a Risk in 2009?

According to the Barclays Capital Weekly Economic Monitor, there "is little immediate risk of deflation."
The report goes on to say that although headline inflation will fall into negative territory (yr to yr) heading into fall 2009, this is primarily due to falling in energy prices. Once energy prices "find a bottom, inflation will naturally rise back to the level of core inflation. This is a case of a big fall in one relative price, not a broad-based deflation."

The report goes on to say that the real risk of deflation comes in 2010. If the unemployment rate does not come down quickly from the presumed 8% peak, core inflation will drop steadily and could pierce the lower end of the 1-2% Bernanke bands in 2010. This risk argues for continued very accommodative monetary policy for a long time to come. Presumably, the Fed will want to exit from its aggressive market interventions as quickly as the capital markets safely allow. These programs distort the capital markets, put tax dollars at risk, and should be phased out as soon as it is safe.

Related articles by Zemanta

• Consumer prices in record decline
• Bank rates head to zero
• Job Losses Worst In 34 Years