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.

and:

Repeat after me..services 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.)

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