The New Panic: Deflation

Inflation is still raging, but already everyone is terrified about the alternative: deflation. Alan Greenspan’s reputation has been trashed worldwide for his decision to keep interest rates at 1% forever, triggering the housing bubble, but the cries are beginning for Ben Bernanke to do the same thing.

We continue to think Ben Bernanke’s secret plan to deal with the debt crisis is to inflate it away, and plummeting inflation will certainly throw a wrench into that. So the Fed probably won’t complain if the deflation horror stories really get going:

WSJ: Policy makers navigating the U.S. through the global credit crisis may have a new concern on the horizon for 2009: deflation.

The risk of deflation — generally falling prices across the economy, beyond volatile energy and food costs — remains slim. But the financial shock and a faltering economy can set the stage for a deflationary environment.

Federal Reserve officials view broad-based deflation as unlikely but possible. Federal Reserve Bank of San Francisco President Janet Yellen said in a speech this week that the plunge in oil prices along with slackening demand for labour and goods should “push inflation down to, and possibly even below, rates that I consider consistent with price stability.”

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