The Winds of Deflation

Three economic reports today (Friday) that should sound warning bells about deflation.

1. The Labor Department reports that consumer prices are essentially flat. Compared to August 2009, prices are up 1.1%. That’s only slightly lower than the 1.2% year-on-year rise in July. Excluding volatile food and energy, however, consumer prices in August were 0.9% higher than a year earlier. That’s below the Fed’s informal inflation target of between 1.5% and 2.0%.

2. In a separate report, the Labor Department said real average weekly earnings were unchanged in August from July, as both the average work week and hourly earnings were flat.

3. The Thomson Reuters/University of Michigan September reading of consumer confidence showed consumers more pessimistic in September than in August. In fact, consumer sentiment is the lowest since August 2009.

Put the three together and you have what could be a recipe for deflation: Flat consumer prices, weekly earnings, and hours, coupled with increased pessimism about where the economy is heading.

Consumers aren’t buying. That’s rational for families and individuals. They’re debt load is still huge, they’re worried about keeping their jobs, they know they have to tighten belts, and they’re worried about the future.

But for the nation as a whole, it spells even more trouble. If consumers hold back even more, prices will start dropping. When and if they do, consumers will hold back even more in anticipation of still lower prices. That means more layoffs and less hiring. It’s a vicious cycle.

About Robert Reich 545 Articles

Robert Reich is the nation's 22nd Secretary of Labor and a professor at the University of California at Berkeley.

He has served as labor secretary in the Clinton administration, as an assistant to the solicitor general in the Ford administration and as head of the Federal Trade Commission's policy planning staff during the Carter administration.

He has written eleven books, including The Work of Nations, which has been translated into 22 languages; the best-sellers The Future of Success and Locked in the Cabinet, and his most recent book, Supercapitalism. His articles have appeared in the New Yorker, Atlantic Monthly, New York Times, Washington Post, and Wall Street Journal. Mr. Reich is co-founding editor of The American Prospect magazine. His weekly commentaries on public radio’s "Marketplace" are heard by nearly five million people.

In 2003, Mr. Reich was awarded the prestigious Vaclev Havel Foundation Prize, by the former Czech president, for his pioneering work in economic and social thought. In 2005, his play, Public Exposure, broke box office records at its world premiere on Cape Cod.

Mr. Reich has been a member of the faculties of Harvard’s John F. Kennedy School of Government and of Brandeis University. He received his B.A. from Dartmouth College, his M.A. from Oxford University, where he was a Rhodes Scholar, and his J.D. from Yale Law School.

Visit: Robert Reich

1 Comment on The Winds of Deflation

  1. maybe we need to seriously think about carvin up the states and selling them of to other countries.i’m sure china or russia would be interested in buying michigan or cali. if china buys califonika we’ll throw in detroit for $1 or maybe two for one , buy ohio get illinois free, i sure south bejing would like that deal

Leave a Reply

Your email address will not be published.