US Narrowly Escape Deflation
Monday, February 23, 2009 8:45
The annual inflation rate of US disappeared last month for the first time in more than 50 years. However, the rise in consumer prices, which was pushed up by a rise of 6% in petrol costs, has saved the nation from deflation, which is when falling prices force the economy to shrink as consumers cut buying things in the hope of getting them cheaper in the future.
The consumer price index, which is a key figure used in calculating the annual inflation rate, has increased by 0.3% in January, which was the first monthly rise ever since last July. So, America’s annual inflation fell from 0.1% to zero, but did not drop into the negative zone of deflation.
However, the figure of January could be distorted as some companies try to pass price increases on to the consumers at the start of the year, which sends the CPI into a rise that is not a true indication of the direction of prices.
As a result, according to some experts in the field, in spite of the rise in CPI, they expected further inflation by the middle of 2009 and indicated that disinflation pressure is still intense and will stay that way for some time.
The Fed set a more specific inflation target than usual on Wednesday, announcing that it wanted to keep the inflation at the range of 1.7~2%. The central bank hopes the move would help keep self-fulfilling expectations of deflation at bay. Meanwhile, the Fed could also increase the available credit in the market.
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