Academic journal article ABA Banking Journal

Will It Be Deflation or Inflation in 2002? (the Economy)

Academic journal article ABA Banking Journal

Will It Be Deflation or Inflation in 2002? (the Economy)

Article excerpt

SOARING COSTS FOR HEALTH-care benefits or plunging commodity prices? Which is the greatest risk facing the U.S. economy as we move into 2002?

Deflation--or a reduction in the general level of prices, as opposed to a mere slowing in price increases--often accompanies a severe decline in economic activity. With recession afflicting virtually every country in the world in past months, fears of deflation have now surfaced.

Why these concerns? Producer, or "wholesale," prices in the United States have recently posted year-over-year declines. Excess capacity worldwide has depressed raw-material prices, while the strong value of the U.S. dollar has held down import costs. Meanwhile, ongoing improvements in technology have contributed to continual price declines in computers. Finally, intense competition among companies has limited their ability to raise prices, especially when demand is weak.

Signs of falling prices have even raised concerns that the United States might follow the path of Japan, where prices of goods, real estate and stocks have continued to slide.

The situation in the United States, however, differs dramatically from that in Japan. Our banking system is healthy, and our central bank has moved aggressively to inject reserves into the banking system. In contrast, a crushing bad-loan burden continues to plague the Japanese banking system, while the Bank of Japan has resisted trying to pull the country out of its malaise through the purchase of securities.

Note, also, that not all prices in the United States are falling. Indeed, most businesses will contend with double-digit hikes in health-care premiums in 2002. Costs for various types of insurance are also headed sharply higher. …

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