Deflation with a capital “D” may still be a remote possibility, but it’s getting tougher to dismiss the idea that deflation light is here.
Exhibit A is this morning’s update on producer prices, which fell 2.2% last month. That’s the fourth month running that wholesale prices turned south. We can debate exactly when, or if a deflationary climate has begun, but once it’s clear to everyone that the big “D” has arrived it’s probably too late to do much about it. Simply put, if there’s any hope of slaying the deflation dragon, the opportunity is a pre-emptive one. But that leads us back to the question: Is deflation really here? Or is the ongoing price retreat only temporary?
One can argue that collapsing energy prices are the primary cause of the downdraft in wholesale prices. True enough. But energy prices won’t keep falling forever. Indeed, crude oil has fallen sharply since the summer, when it set an all-time record of $147 a barrel in New York. In December, crude’s been trading under $50. Yes, crude and other energy prices may go even lower, and that would keep downward pressure on general price indices. But aren’t we close to the bottom of this downward spiral?