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business Wednesday 13 May 2020
Why prospect of deflation could pose a threat to U.S. economy

By MARTIN CRUTSINGER to keep prices from falling.
AP Economics Writer Yet if consumers and busi-
WASHINGTON (AP) — The nesses avoid spending at
economic paralysis caused anything near normal lev-
by the coronavirus led in els for many more months
April to the steepest month- in light of continued shut-
to-month fall in U.S. con- downs, persistent unem-
sumer prices since the 2008 ployment and fears about
financial crisis — a 0.8% the virus, a bout of defla-
drop that was driven by a tion would become more
plunge in gasoline prices. likely. Most analysts have
And excluding the nor- said they believe that sus-
mally volatile categories of tained economic growth
food and energy, so-called won't resume until some-
core prices tumbled 0.4%, time next year, perhaps af-
the government said in ter a vaccine or an effec-
its monthly report on con- tive drug therapy is avail-
sumer inflation. That was able and can be widely
the sharpest such drop on distributed.q
records dating to 1957.
The business shutdowns, re-
duced travel and shrunken
consumer spending that
the virus has caused have
likely sent the U.S. econo-
my into a severe recession.
The resulting drop in eco- This Aug. 11, 2019 file photo shows credit cards in New Orleans.
nomic activity is exerting a Associated Press
powerful downward force and wages and often in now, after all, if you can bedeviled by deflation. Be-
on prices throughout the the value of homes or other purchase the products you ginning in the 1990s, Japan
economy. Tuesday's report assets. During deflationary want — from furniture and struggled, often in vain, to
raises the prospect of de- periods, broad barometers appliances to cars, boats keep inflation from falling.
flation, a prolonged drop like the Consumer Price In- and computer equipment As a consequence, Japan
in prices and wages that dex that the government — at even lower prices suffered through more than
typically makes people issued Tuesday will show three or six months from two decades of anemic
and companies reluctant consistent price changes now? Collectively, such de- economic growth.
to spend and can prolong below zero. And for two lays slow consumer spend- WHAT CAN U.S. POLICY-
a recession. Not since the months now, that is what ing, which drives about 70% MAKERS DO TO AVOID THAT
Great Depression of the the CPI has shown: The in- of U.S. economic activity. FATE?
1930s has deflation posed dex fell 0.4% in March and Consider the economy's The Federal Reserve has
a serious economic threat 0.8% in April. The trend is 4.8% annual contraction responded aggressively
in the United States. likely to persist as the vi- during the January-March and on multiple fronts to try
"If deflation becomes em- rus depresses economic quarter. That quarterly de- to counter the economic
bedded in the economy, it growth and consumer cline, the worst since the damage inflicted by the
can be difficult to uproot," spending and thereby ex- 2008 financial crisis, was coronavirus shutdowns. The
said Gus Faucher, chief erts downward pressure on led by a broad pullback in Fed has cut its benchmark
economist at PNC Finan- prices. consumer spending. interest rate to a record
cial Services. AREN'T FALLING PRICES Deflation also tends to hold low near zero, where it had
Over the past 12 months, GOOD? PEOPLE CAN BUY down wages and to make stood for seven years after
overall prices have risen MORE THINGS WITH LESS the inflation-adjusted cost the financial crisis. The cen-
a scant 0.3%, the smallest MONEY, RIGHT? of a loan more expensive tral bank is also spending
year-over-year increase It's true that households can for borrowers. And in keep- trillions of dollars — more
since 2015. Core inflation make their paychecks go ing borrowing and spend- than it ever has, by far —
has increased 1.4%, the further when prices are flat ing persistently weak, de- to buy Treasury and mort-
lowest pace since 2011. or falling. And with tens of flation can prolong a re- gage bonds to try to keep
With consumer prices fall- millions of people suddenly cession. short and longer-term rates
ing, concerns have arisen out of work, this means that HAS THE U.S. EVER ENDURED as low as possible to sup-
that the United States might at least their unemploy- A PERIOD OF DEFLATION? port borrowing and sustain
succumb to a debilitating ment benefits will stretch Yes, but not for nearly the economy. The Fed has
bout of deflation for the first further. The 20% drop in nine decades, since the also unveiled numerous
time in decades. gasoline prices in April, for Great Depression. Dur- programs that are intend-
The fact that falling pric- example, will provide a ing the Depression, falling ed to facilitate a smooth
es tend to cause worry welcome benefit to motor- prices meant that farmers and continual flow of cred-
among economists and ists. All that said, economists couldn't receive sufficient it, which is essential to the
policymakers may strike fear that sustained price payments for their crops. financial system.
many people as puzzling. declines would hinder, not This caused millions of WILL ALL THOSE EFFORTS BE
Here are some questions help, economic growth. families to lose their farms ENOUGH?
and answers: HOW? to banks after they failed No one knows for sure. The
WHAT EXACTLY IS DEFLA- The main reason is that fall- to make their mortgage Fed's broad efforts, which in
TION? ing prices typically make payments. More recently, a normal economy would
Deflation is a broad and consumers and businesses some other economies, no- likely accelerate inflation,
prolonged decline in prices delay spending. Why buy tably Japan's, have been may or may not be enough