Understanding the Risk of Deflation

Deflation and its likelihood will be hot topics of discussion over the next few weeks. The risks of a destabilizing deflation, while still relatively low, have increased and will likely increase further during the second half of this year, when economic growth is widely expected to slow and inflationary pressures are expected to ease even further. In some sense, deflation is already here in that … Deflation and its likelihood will be hot topics of discussion over the next few weeks. The risks of a destabilizing deflation, while still relatively low, have increased and will likely increase further during the second half of this year, when economic growth is widely expected to slow and inflationary pressures are expected to ease even further. In some sense, deflation is already here in that the two most widely followed price indices, the Consumer Price Index and Producer Price Index, have both declined for the past three months. These declines, while noteworthy, are not the persistent, destabilizing deflation the Fed is worried about. They do bring the year-to-year change in inflation into a zone where monetary policy will in all likelihood have to become much more proactive and aggressive. Thank you for your interest in Wells Fargo’s Economic Commentary by email. You are receiving this message because you have requested Economic Commentary information and updates sent via email. If you no longer wish to receive these emails, please click on the following link to access the Economic Commentary by email registration page: http://www.wellsfargo.com/economicsemail.

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