Deflation Returns to the United States

The Guardian says the U.S. in a deflationary period, and politely points out that Bernanke and the Obama administration are being less-than-honest about it:

The US economy has begun to deflate for the first time in more than half a century as a slump in demand pushes energy and food costs lower.

The consumer price index fell at an annual rate of 0.4% in March, the first decline since August 1955, figures from the US labour department showed today. It was bigger than the 0.1% drop expected by economists….

“It reinforces the deflationary fears that the Fed has been voicing,” said George Davis, currency strategist at RBC Capital Markets…

Certainly, inflation is no longer an issue.

“The notion that inflation will pick up in the near-term is completely out of the picture,” said Peter Kenny at Knight Equity Markets in New Jersey. “Now we’re looking at numbers that speak to recession without the prospect of inflation.”

The figures came as the head of Wal-Mart said that he still saw a “lot of stress” in the economy and did not anticipate a quick end to the recession. “It’s not a ‘V’ recession, where we’re just going to bounce out and come back,” Mike Duke said on NBC’s Today Show.

His comments contrasted with those of Barack Obama and Ben Bernanke, the head of the US central bank, who made a concerted effort yesterday to talk up the prospects for the American economy despite fresh evidence of the squeeze on consumer spending. US retail sales unexpectedly fell last month.

“With the unemployment rate and the output gap both headed for 10% and the financial system still crippled, the risk of a pernicious debt-deflation emerging [where the collateral on loans decreases damagingly in value] is still much bigger than the risk that the Fed’s quantitative easing actions will lead to runaway inflation,” said Paul Ashworth, senior US economist at Capital Economics.

For more on deflation and potential runaway inflation sometime in the future, see this.

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