Article first published as Deflation Fears Linger for the US, Fed Data Shows on Technorati.
Market analysts are predicting that the US may have to face deflation for the coming one or two years. Consumer confidence has fallen to its 13-month low for August month.
Even though the consumer prices rose by 0.3 percent and food prices and energy costs have gone up consumer confidence dropped as they are generally ignored due to their volatility. Speculations are floating that the US Federal Bank may resort to large-scale debt purchases. Some analysts reject for such case saying the data was not so weak.
Reuters index of consumer sentiment dropped from 68.9 in August to 66.6 in September’s preliminary reading, Reuters said in a report (Go to consumer sentiment graph here). Despite encouraging results posted by Oracle Corp and RIM, the Fed data prevented the stock prices from raising that ended nearly flat.
Fed data showed that the household wealth came down by $1.5 trillion to 53.5 trillion due to high unemployment of 9.6 percent. The household wealth had reached its peak $64.2 trillion at the end of 2007 when the US economy began crumbling into recession.
The US government is reeling under over indebtedness for decades. Miguel Valls has mentioned five possible factors that could bring deflation, irrespective of whether the debt is internal or external. They were quoted from This Time is Different by Rogoff and Reinhar. They clearly project how the US is in danger of slipping into deflation trap. The fate of Japan’s economy is worth mentioning here, that is working hard to gain a bit of inflation under depressing consumer demand. Japanese economic conditions are forcing frequent political turmoil, the new government of which has already seen third Prime Minister.
Slow Growth & Deflation
IMF predicted earlier this week that the slow growth for the second half of 2010 would be unavoidable. Policy makers would meet on 21 Sept to review the monetary policy. Many analysts are expecting the Fed may buy long-term government bonds to keep borrowing costs low, in coming months.
The Fed already kept bank rate at 0.25 percent for a long period and pumped more than $1.7 trillion in to the economy. In the 12 months to August, the overall CPI rose 1.1 percent, less than the 1.2 percent increase through July. The year-on-year core rate was up only 0.9 percent for a fifth straight month.
Despite the weak data, some analysts are confident that the deflation fears are overdone. Unless the economic policies are mended towards the wellbeing of the people instead of the market of a few people, these numbers will not stop threatening the governments.