Is the Fed’s liquidity attack winning the war on deflation? This morning’s update on wholesale prices, new housing starts and new building permits offers a few reasons for answering with a tenuous “yes.” Maybe. Even if that’s true, we’re a long way from a “recovery” that’s worthy of the name. But perhaps the blood will run a little slower; perhaps it’ll stop flowing altogether. Stranger things have happened.
First let’s take a look at prices. The Producer Price Index (PPI) for February rose a modest 0.1%, the Bureau of Labor Statistics reports. That follows January’s roaring 0.8% jump. And not a moment too soon, in the wake of large back-to-back monthly declines last year in PPI from August through December. A similar run of deflation has weighed on consumer prices as well.
Is it safe to declare the deflation risk over? No, not yet, but it’s not too soon to start thinking about the light at the end of the tunnel, dim though it’s likely to be for the time being. We’ve been arguing for some time that the first priority for the economy is nipping deflation in the bud. Without that, broader progress on 1) stopping the bleeding; and 2) laying the groundwork for recovery isn’t possible.