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Inflation All But Disappears

Price decreases are rare bright spot in bad economy

By Mark Huffman
ConsumerAffairs.com

January 19, 2008

While the Federal Reserve spent the first part of 2008 worried about rising prices, the latest figures show inflation has disappeared off Fed radar screens.

"Strong growth, especially when they cause bubbles to arise, generally leads to rising inflation. Economic slowdowns cause price increases to slow. Now that we are in a steep recession, it shouldn't be any surprise that inflation is disappearing," said Joel Naroff, chief economist for Naroff Economic Advisors, in Holland, Pa.

The Labor Department report shows the fall in prices continues to be led by energy prices, which have resulted in sharply lower prices at the pump for motorists. Food prices, which had also been soaring, have stabilized.

Most other categories also showed that price pressures have disappeared. Excluding food and energy, there has not been an increase since September 2008. The only areas where costs continue to rise are the usual ones: medical care and education.

"The collapse in energy costs has been a boon to households. They are no longer mortgaging their homes, at least those that have positive equity, in order to get to work," Narroff said. "But they are not spending that money, which is the correct action at this time. People are paying down debt and saving more and overextended consumers are getting their fiscal house in order. That will allow them to spend more once we start seeing the end of the recession tunnel."

Naroff also said he isn't overly concerned about the prospects of deflation. Most of the deflationary pressures in the economy can be traced to energy prices, which he thinks won't fall much father.

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