Worries Grow About Deflation [AUDIO]

As the economic recovery slowly continues, instead of worrying about inflation or a double-dip recession, there is increasing concern being voiced by financial experts about the possibility of deflation.  Rutgers economist James Hughes says deflation is “when through various factors, prices drop – due to a lack of demand…the problem with deflation would be consumers would stop spending.”

He says in an inflationary world, you buy today because you know that prices would be higher tomorrow, but the mindset in a deflationary scenario is “in essence, if prices are declining, why buy today when it will be cheaper tomorrow?

Hughes adds “we’ve had a deflation in housing prices the past 4 years- many households are very hesitant to pull the trigger on buying a new house- because they feel the price may be cheaper tomorrow…deflation presents all sorts of problems – workers in the workplace – if it’s an deflationary environment – they have very little leverage in securing a pay increase- so it would translate into stagnant incomes.”

At the same time he points out “while housing prices are still declining, all of a sudden we’re starting to see a resurgence in gasoline prices again – those prices are still considerably higher than they were a year ago…so really what we’ve experienced this past year is not outright deflation, but dis- inflation, which is a process of the rate of inflation declining markedly.”

Hughes adds “we still have a slight upward trend in prices and the payroll employment numbers – both in New Jersey and nationally -have improved dramatically the past year, so that’s generating at least some increase in buying power…what the past couple of years have demonstrated is we are still vulnerable to external shocks…so if the European train wreck doesn’t get corrected – if Iran tries an oil boycott and blocks the straits, that could then precipitate a recession in the United States and then deflation would become a very real concern.”