Deflation Fears Linger for the US, Fed Data Shows
Market analysts are predicting that the US may have to face deflation for the coming one or two years. Consumer confidence fell to a 13-month low in August.
Even though consumer prices rose by 0.3 percent and food prices and energy costs have gone up, consumer confidence dropped, as these costs are generally ignored due to their volatility. There is speculation that the US Federal Bank may resort to large-scale debt purchases.
Consumer Confidence
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 rising and the index ended nearly flat.
Fed data showed that household wealth decreased by $1.5 trillion to 53.5 trillion due to high unemployment at 9.6 percent. Household wealth had reached its peak of $64.2 trillion at the end of 2007 when the US economy began crumbling into recession.
Overindebtedness
The US government has been reeling under overindebtedness for decades. Financial analyst Miguel Valls has mentioned five possible factors that could bring deflation, irrespective of whether the debt is internal or external, as quoted in This Time is Different by Rogoff and Reinhar. The authors clearly project how the US is in danger of slipping into deflation trap. The fate of Japan’s economy is worth mentioning here; the country is working hard to gain a bit of inflation under depressing consumer demand. Japanese economic conditions are forcing frequent political turmoil, the new government having already seen its third Prime Minister since 2007.
Slow Growth & Deflation
IMF predicted earlier this week that slow growth for the second half of 2010 would be unavoidable. Policy makers will meet on September 21st to review the monetary policy. Many analysts are expecting that the Fed may buy long-term government bonds to keep borrowing costs low, in coming months.
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