Headline inflation last month rose a modest 0.2%, the Bureau of Labor Statistics reported today. That’s been the pace each and every month since last September. Over the past year, inflation was a mild 2.6%. On the surface, it’s all quite humdrum. But wait—what’s this? There’s an outlier in the core inflation trend for January: CPI less food and energy slipped by 0.1%.

The last time core CPI went negative on a monthly basis was 1982. Meantime, flat readings are more frequent, including last November’s zero reading for CPI ex-food and energy. The question, of course, is whether this is an early warning sign that the deflationary winds are starting to blow stronger (again)? For the moment, it’s too soon to tell. One month of modestly negative core consumer inflation is hardly a definitive sign of anything.
Nonetheless, it’s hard to overlook the fact that negative monthly readings for this data series are extraordinarily rare. For the sake of economic stability, let’s hope it stays that way. Yes, a little deflation every now and then wouldn’t hurt. Indeed, consumers have reason to hope for deflation, which most folks see as a sale imposed from on high. But from a macroeconomic policy perspective, deflation is about as welcome as the barbarians in Rome. That is if we’re talking of persistent deflation. The good news is that we’re quite a long way from that sad state of affairs. Nonetheless, when we see negative signs in core CPI, we’re inclined to stop and reflect.
Simply put, we thought deflation was so 2009. Wasn’t that battle already won? Perhaps not. If this was a “normal” business cycle, it’d be easy to dismiss what amounts to a small and statistically insignificant bout of deflation. But we’re still suffering the aftershocks of the Great Recession. And as This Time is Different: Eight Centuries of Financial Folly reminds, business cycle contractions brought on by a financial crisis are an especially pernicious strain of decline. Debt, in short, tends to be unusually hefty in these cases, which is no small catalyst for deflationary pressures.
The recent history of Greece and its pile of red ink remind that the risk of deflation, while far lower today than a year ago, isn’t quite nil. Nor are the spillover effects benign across international borders.
Still, there’s reason to think that today’s core CPI number is a blip, or so yesterday’s wholesale price report for January suggests via Morgan Stanley’s David Greenlaw.
We tend to agree, in part because monetary stimulus is still aggressive, at least in nominal terms. The Fed continues to chase inflation, and to some extent it’s been successful. But as today’s consumer price report reminds, there may yet be some backtracking on the road to reflating.