Deflation Ahead? No Worries

Oil and gasoline prices are often the villain in inflation scenarios. This time, they’re making it look as if the deflation ogre is out of the cave.

Although prices fell in June for the third consecutive month, deflation is unlikely to persist. Special factors have been in play, and the outlook remains one of very low inflation, not falling prices.

This latest dip in prices brings the inflation rate for the past year to a meager 1.1%, with prices flat -- technically, down 0.1% -- over the first half of 2010. While this may be raising worries about persistent deflation, alarm isn’t warranted. The reason has to do with energy prices and the process of adjusting reality for seasonal patterns.

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Richard DeKaser
Contributing Economist, The Kiplinger Letter