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Kimberly Amadeo

Lack of Inflation Not Really a Good Thing

By September 20, 2010

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Prices in August rose .3%, mostly due to a 3.8% increase in gas and oil prices, according to the latest Consumer Price Index (CPI).  Over the last year,  prices have gone up 1.1%.  (Source: BLS Consumer Price Index: August 2010)

Prices aren't going up much, so this is a good thing, right? Not necessarily.

A healthy, growing economy can sustain a core inflation rate of around 2%.  Core inflation measures prices without volatile food and energy costs, which is why the Fed watches it more than the overall inflation index.

The core inflation rate since last year was only .9%, well below the Fed's target of 2%. This is bordering on deflation, which is when prices fall. Deflation is an ongoing symptom of a slow-growing economy.

What It Means to You

Low prices are a symptom of sluggish demand.  What's keeping demand down? Lack of confidence in future income potential and/or wealth. People aren't out buying like they used to because  they are either unemployed or afraid of losing their job. They've also lost a great deal of wealth in their home equity or savings/investments.

Until people regain confidence in the economy, prices will remain flat. The only exception to the rule is with stagflation. That could happen as the value of the dollar declines, which would raise the price of imports.


Your Opinion: Which Is the Bigger Concern - Inflation or Recession?

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