Economists warn of deflation possibility

July 26, 2010 at 1:33 PM

NEW YORK, July 26 (UPI) -- Economists and others are warning that a period of deflation is a possibility for the U.S. economy, given high unemployment and a stalled economic recovery.

The Los Angeles Times reported Monday that John Mauldin, president of Millenium Wave Advisors said recently the risk of falling prices is something "we have to take ... seriously." Nobel Prize winning economist Paul Krugman also warned of prices "visibly sliding toward deflation" in a recent column.

"It's a good bet that by some measures we'll be seeing deflation by some time next year," Krugman wrote.

Deflation crimps the economy by cutting into profits, which can trigger layoffs, creating a vacuum of purchasing power, which sucks prices down further. Even consumers who can afford purchases hesitate, expecting better deals if they wait, which stalls manufacturing, one of the brighter spots in the U.S. recovery so far.

By numbers, the annual inflation rate was at 1.1 percent in June. Core inflation -- excluding food and energy prices -- was 0.9 percent, its lowest in more than four decades.

Richard Katz, editor of the Oriental Economist Report, said the U.S. was better equipped to handle a deflationary trend than Japan where deflation put the economy on wobbly legs from 1981 through 1991.

"The policymaking response in the United States is better, in part because of the precedence of Japan," he said.

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