Saturday, 1 May 2004

No deflation risk

A new study by the Federal Reserve Bank of Atlanta published in the First Quarter 2004 issue of the Economic Review suggests that the deflation scare last year was overstated. According to the article titled Decomposing Inflation, disinflation had been concentrated mainly in rent and used car prices.

If disinflation was not as bad as previously thought, it means that the prolonged monetary stimulus that the Fed is dishing out may be unnecessary. Worse, it may even been counterproductive if it leads to over-accumulation of debt, which increases the risk of deflation -- the very problem that the Fed is trying to prevent (see also Stocks rise amid deflation confusion).

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