Deflation still haunts the American landscape and until the threat subsides there will be no rest for anxious investors. But maybe, just maybe, the anxiety level will drop a notch or two with this Friday’s update on consumer prices.
As we’ve discussed in recent months, including here, the perils of falling prices is upon us. In December, the CPI posted its first annual decline since 1955. Nipping the deflationary problem in the bud is second to none as a national economic priority and the Federal Reserve, Congress and the White House are on the job of trying to stabilize if not lift prices. Helping the cause is the mixed pricing trend in energy last month.

Energy prices fell sharply in late 2008, which helped bring CPI down. The energy portion of CPI lost ground for five months running through December, the Bureau of Labor Statistics reports. But as our chart below shows, energy prices in January started showing signs of stabilizing. Although spot prices for crude oil and natural gas continued to lose ground last month, gasoline and heating oil prices rose.

In the upside down world we live in at the moment, higher prices for energy and other goods are reasons for hope because they suggest that deflationary forces may be ebbing. It’s still premature to declare victory in the war on deflation, of course. No doubt that the months ahead will provide plenty of mixed messages as the economy continues to struggle. But there’s reason to think that this Friday’s CPI report will offer a small sign that the risk of freefalling prices is slowing, if not passed.
Even if that’s true, that by itself won’t cure the problems that afflict the economy. But it’s a start. Recovery is always preceded by stability, and one component of stability this time around requires an end to deflation. Will the next CPI update offer some good news on that front? Stay tuned.