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, it seems they still dont get, I have no idea how deflation is still a fear... well it bodes well for gold...
NEW YORK (CNNMoney.com) -- Battling inflation has historically been a major aim of the Federal Reserve. But central bank policymakers now have an even bigger worry: deflation.
Prices have been slowing for three months. And members of the Federal Reserve openly voiced concerns about deflation at their last meeting.
The Fed now expects inflation of 1% or less this year and next, not including food and energy prices.
While spending less on purchases may sound appealing to consumers, falling prices and wages can cause much more economic pain than rising prices.
Businesses respond to declines in prices by cutting output and jobs. Why invest in making something to sell if the price you'll get for it will drop? Consumers hold back on buying for the same reason. The result is a downward spiral that can bring about a depression in a worst case scenario, or a prolonged period of economic stagnation, in the best case.
"It isn't that inflation in itself is a good thing. It's that the low inflation is a symptom of too little demand," said Scott Sumner, economics professor at Bentley University.
One of the biggest worries among economists is that fighting deflation is much tougher than turning back inflation.
With its key interest rate already near 0% for the last 18 months, the Fed can't cut rates to spur the economy.
Until a couple of months ago, most experts assumed the Fed's next step would be to raise rates in order to reduce the risk of inflation. The central bank's next moves are now less clear.
"There's a tried and true policy response to inflation -- raise interest rates and eventually you'll win," said Mark Zandi, chief economist for Moody's Analytics. "We haven't had a lot of bouts with deflation, but in those battles, central banks have never won in a clear-cut way."
Sitting on the sidelines
In testimony Wednesday Fed Chairman Ben Bernanke said that while he believed inflation would be in check for the foreseeable future, he wasn't particularly worried about deflation taking hold.
But others argue the Fed has to be prepared to take unprecedented steps to spur economic activity and move prices higher, especially since Congress appears unwilling to pump more money into the economy and add to record deficits.
Prices have been slowing for three months. And members of the Federal Reserve openly voiced concerns about deflation at their last meeting.
The Fed now expects inflation of 1% or less this year and next, not including food and energy prices.
While spending less on purchases may sound appealing to consumers, falling prices and wages can cause much more economic pain than rising prices.
Businesses respond to declines in prices by cutting output and jobs. Why invest in making something to sell if the price you'll get for it will drop? Consumers hold back on buying for the same reason. The result is a downward spiral that can bring about a depression in a worst case scenario, or a prolonged period of economic stagnation, in the best case.
"It isn't that inflation in itself is a good thing. It's that the low inflation is a symptom of too little demand," said Scott Sumner, economics professor at Bentley University.
One of the biggest worries among economists is that fighting deflation is much tougher than turning back inflation.
With its key interest rate already near 0% for the last 18 months, the Fed can't cut rates to spur the economy.
Until a couple of months ago, most experts assumed the Fed's next step would be to raise rates in order to reduce the risk of inflation. The central bank's next moves are now less clear.
"There's a tried and true policy response to inflation -- raise interest rates and eventually you'll win," said Mark Zandi, chief economist for Moody's Analytics. "We haven't had a lot of bouts with deflation, but in those battles, central banks have never won in a clear-cut way."
Sitting on the sidelines
In testimony Wednesday Fed Chairman Ben Bernanke said that while he believed inflation would be in check for the foreseeable future, he wasn't particularly worried about deflation taking hold.
But others argue the Fed has to be prepared to take unprecedented steps to spur economic activity and move prices higher, especially since Congress appears unwilling to pump more money into the economy and add to record deficits.
I really dont see where the deflation numbers are coming from, but base purely on my own experience. It seems to me prices at restaurants, grocery store etc. have gone up in the last 6 months...
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