Reader's Questions

According to the Labor Department:

- The Producer Price Index has increased by (a seasonally adjusted) 0.2% from April. This is 0.4% less than predicted by many analysts.

- Wholesale prices have actually fallen by 5% over the past 12 months resulting in the largest annual plunge in almost 60 years.

- Energy prices have risen by 2.9% overall, with a 13.9% increase in the cost of gasoline in May.

- Food prices fell by 1.6% in May with Egg prices spiraling down by 27% (after a price leap in April of 43.7%)

These figures, along with speculation that fuel prices are artificially high due to investor confidence in a strong economic recovery, have lead several economists to openly discuss concerns of deflationary effects creeping into the U.S. economy. The United States has not experienced a significant period of deflation since the Great Depression however price declines are also being noted in several major Asian economies including Japan, China and India. The primary defense against deflation by the Fed has been to raise interest rates which are currently at record lows. However, as mortgage rates are beginning to creep up and the Fed is uncomfortable with raising rates until the unemployment rate stops rising (currently at a 25 year high of 9.4%), it is unlikely to take such steps.

What does this mean? The government appears to have taken a wait and see approach on deflation.

Source: The US Labor Department, NBC News

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