Do Falling Oil Prices Raise The Threat Of Deflation?.
The spectacular drop in oil prices means that inflation is going to fall even further below the Fed’s 2% target. Does that raise any new risks for the economy? I say no, and here’s why.
Year-over-year percent change in the monthly deflator for personal consumption expenditures. Source: FRED.
In economists’ theoretical models, inflation usually is often thought of as a condition in which all wages and prices move up together by the same amount. For a given nominal interest rate, the lower inflation, the higher is the real cost of borrowing. With the short-term nominal interest rate still stuck at zero, a decrease in inflation could discourage spending, something the Fed would rather not see happen in the current situation. Or so the theory goes.
Related: Low Oil Prices Killing Off Fuel Subsidies
But typically, consumers often have something very different in mind when they talk about inflation. Many people think of inflation as a condition where the cost of the goods and services they buy goes up but their wages do not. Not so surprising then that while the Fed says it wants more inflation, most consumers say they do not.
