Posted
Nov 20 2008, 02:50 AM
by
Bernhard Warner and Matthew Yeomans
Sound the alarms! Consumer prices are in a freefall, stoking fears the economy is on the precipice of deflation. The Labor Department on Wednesday reported the prices of consumer goods fell by 1 percent in October, the biggest one-month drop in 61 years. As the New York Times points out, no, falling prices are not a good thing for an already shrinking global economy. "While most consumers might welcome the idea that things are getting cheaper, deflation is an economists’ nightmare," the NYT writes. For starters, declining prices would greatly minimize the impact of the Federal Reserve's previous rate cuts. Unresponsive monetary policy is what sunk Japan in the 1990s, the so-called "lost decade," pundits are quick to point out.
What is the Fed to do? Cut again. According to the Financial Times, "the U.S. central bank may cut interest rates again by as much as 50 basis points from the current level of 1 percent in December." Analysts at JP Morgan Chase predict the Fed will go even lower—down to zero by early next year. It's not just the U.S. that is seeing a rapid decline in prices. Prices are also falling across Europe and in Japan, the NYT reports
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