The Great Deflation of 2009

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Yeah, yeah, inflation’s the highest it’s been in 17 years. But Business Week‘s Michael Mandel–who is a real live Ph.D economist!–has been writing a series of blog posts making the case that it’s going to peak soon if it hasn’t already. And that next year we may actually be talking about falling prices. A sampling:

As the economy slows, the demand for commodities is going to fall. The price increases for energy and food could very easily reverse themselves over the next year. And with a weakening labor market, there’s little chance of starting a wage price spiral.

When the price of energy and food starts to drop, it will pull down the CPI just as quickly as it pulled it up.


Repeat after inflation is slowing, not rising. In particular, producer price inflation in the “traditional service industries” is only 0.6%, on a year over year basis, down from 1.8% in December.

But you would never know this, from the coverage of today’s PPI report. The majority of the economy is services, not manufacturing. Yet most reporters (slap, there I go again) persist in focusing on the producer price index for goods. … In fact, the BLS producer price index for “traditional service industries” is arguably the best gauge of inflationary pressures that we have.

“I could be crazy,” Mandel writes. I doubt that. Premature, maybe. But commodities prices can’t keep going up forever. (Why not? Because we’ll either produce more of them, find cheaper substitutes or the economy will collapse.)