US/World economic crisis

Deflation in US economy

Article published on the 2009-04-16 Latest update 2009-04-16 10:13 TU

Demonstrations outside the Colorado State Capitol building in Denver on 15 April 2009
(Photo: Reuters)

The US consumer price index fell by an annual rate of 0.4 per cent in March, according to figures from the US Labor Department, signalling a period of deflation. The US economy has not experienced deflation since August 1955.

A fall in energy prices was mostly responsible for deflation. Energy costs fell by three per cent in March 2009.

But with energy and food costs excluded, the picture is not so gloomy. Inflation would have stood at 1.8 per cent.

Deflation is a sustained fall in the price of goods and services in real terms, which in turn increases the real value of money.

But economists are concerned that this could become a problem if the trend continues. A deflationary spiral signals an ongoing fall in real prices and plummeting asset prices. It also makes it difficult for governments to apply monetary policy to help stabilise the economy.

Figures from the Federal Reserve on US industrial production also showed a fall of 1.5 per cent for the fifth consecutive month in March.

One exception was output of motor vehicles and parts, which increased marginally in March. But it is still lower than in the same period last year.

Despite this, US stocks fared well on Wednesday. The Dow Jones Industrial Average increased 1.38 per cent to close at 8,029.62 points. While the Nasdaq made less impressive gains, up 1.08 to 1,626.80 points.

Meanwhile, Republicans declared Wednesday national tax day with “tea party” style protests in some US cities.

The demonstrations, copying the famous 1773 Boston Tea Party against taxes imposed by Britain, were intended to show President Barack Obama that citizens will not accept higher taxes and more government spending.

Around 1,000 people gathered outside the White House to wave placards inscribed with “Stop Big Government” and “Taxation is Piracy”.